Insight into how the gaming machine market may shape up in a new, vendor-consolidated environment
It is doubtful the slot machine industry will experience a year like 2014 ever again, at least when it comes to acquisitions and mergers.
“For the past 15 years there has been merger and acquisition activity in the gaming equipment space, the vast majority being tuck-in acquisitions—relatively small deals for the most part,” said Todd Eilers, director of research for Eilers Research LLC, a California-based boutique research firm focused on servicing the gaming equipment, technology, and interactive gaming sectors. “But things started to pick up in 2012 and 2013, and in 2014 we obviously had some craziness going on led by some multibillion dollar transactions. The sheer magnitude of these deals were pretty dramatic…the gaming supplier space really consolidated.”
These multibillion dollar transactions included the purchase of International Game Technology by GTECH, which had previously purchased Spielo and other game providers. The combined companies have since changed their name to International Game Technology PLC (IGT). A few weeks later, Scientific Games, which had acquired WMS Gaming in 2013, bought Bally Technologies, which had recently purchased Shuffle Master. So in a couple of deals, seven formerly independent gaming suppliers were merged into two large corporations. While this was occurring, other smaller deals—such as Aristocrat Technologies’ acquisition of VGT and Paltronics, GCA’s purchase of Multimedia Games, and American Gaming Systems’ recent agreement to buy Cadillac Jack—have further condensed the pool of gaming machine manufacturers.
The impact these recent mergers are having on the slot machine market in terms of products, pricing and innovation both now and in the immediate future were the topics tackled by a panel of gaming machine suppliers and operators at the recently held Southern Gaming Summit in Biloxi, Miss. The panel was moderated by Eilers, who conducted a question and answer session with the following participants: Warren Davidson, director of slots for Kinder, La.-based Coushatta Casino Resort; Paul Luquet, director of sales, eastern region for Aruze Gaming America; Tarzan Treadway II, slot operations manager for Hard Rock Hotel & Casino Biloxi; and Matt Wilson, senior vice president of sales and marketing for Aristocrat Technologies. What follows are some excerpts from this discussion.
Why did the mega mergers between GTECH and IGT and Scientific Games and Bally Technologies ultimately happen and do you think that is a good thing?
Wilson: It was an amazing year for transactions. I think the gaming industry had been a fairly stable market for the past 10 years, in terms of number of suppliers. I think it has all been driven by some of the economic fundamentals of the industry. Our view is that the gaming industry is really hitting an inflection point—it is becoming a mature market. Market size is down dramatically this year; about 55,000 machines are being bought by casino operators around the country, and historically in years past it used to be 100,000 to 120,000 machines each year.
I think the acquisitions are really just a re-basing of the supply and demand curve in the marketplace. The industry, on the manufacturing side, was probably investing too much money across too many manufacturers. With all these consolidations have come huge amounts of cost synergies; that is the market just re-basing itself and trying to get that supply and demand equilibrium back in balance.
In terms of what it means for operators, it means less choice, which is not necessarily a good thing. I think there are enough suppliers in the marketplace to keep us all honest. I don’t think there is an imbalance to the point where it is going to have an impact on pricing, But less choice, from a purely economic standpoint, means less pricing pressure and the ability for manufacturers to price differently.
Luquet: Working with Aruze as a single-owned entity, we are on the outside looking in on this issue. But obviously, the mergers impact us as well.
Essentially, a very soft market with fierce competition created the perfect environment for mergers and acquisitions. I like to think the emerging companies such as Aruze, Ainsworth and Multimedia Games had a lot to do with the timing of these mergers, in that we were starting to take a sizeable slice of the slot sales pie.
I also think a lot of companies are trying to become conglomerates and need product offers they can bundle. With these mergers, you now have companies that are in lottery, VLT and slot markets here and around the world.
As to whether these mergers are good or not, I think that remains to be seen. But I do think we all need it to be good. If not… it puts a strain on the operators, which is bad for the industry and bad for all of us. I think we are all dependent on it working out.
Davidson: Six years ago, when I arrived at Coushatta, we had six different vendors on our floor. I have seen that number increase to 11 with more coming up all the time. I think the mergers had to happen; there was just too much competition for the available sales that were out there. I don’t like to see it. I would rather have more competition, more choice and more leveraging for the pricing. But we will be able to work with it. There is still a lot of competition out there, so I don’t see it as a huge impact.
As to whether it is a positive or a negative, I think it will depend on how these companies are run. In Scientific Games, WMS and Bally bring different things to the table. So it is my hope… that these brands will be kept separate for the most part, in order to make sure you have that diversity of product in the homogenized product line. I like having a big selection to choose from.
Treadway: One of the things driving this merger activity is the recurring revenue. As the market has matured, and the operators are looking more and more at the bottom line, a lot of us are looking at our WAP and lease products and are trying to minimize our expenses and be a little more frugal with that area. That is a recurring revenue stream for the big boys, and it has been hurt significantly by that and by other smaller vendors that can offer a comparable product for a more competitive price.
The recurring revenue stream is kind of drying up and it has presented an opportunity for some of these guys to be gobbled up.
In your opinion, how has the pricing dynamic changed since we’ve had this wave of consolidation? Has it changed at all? Do you expect it to change?
Wilson: From what I have seen, it is not showing through in any of the earnings calls so the average selling price is not going up. We still are in a very competitive market and we have to win business on a daily basis…. we have to make sure we get out there and earn it. There are enough suppliers in the marketplace to keep us honest.
Luquet: These mergers had a lot to do with creating economies of scale… in some situations, the operators buying power will go up when you talk about packaging and bundling and things like that.
Davidson: I am not expecting having a cost saving being passed on to the customer. But there is still plenty of competition out there. I have actually been pleasantly surprised with the pricing this year on deals I have been able to get, especially considering some of the new platforms that are being introduced. There have been some pretty competitive discounts. I hope we don’t see a major drop in research and development… we need great games that people want to play now as well as for the future.
Treadway: We also have seen some attractive pricing this year from folks who want to establish a footprint or protect a footprint. I agree that there will probably be savings, but I do not think we will necessarily see that; that is probably what the merged supplier needs to do in order to make their nut for having bought each other out.
The gaming market is reaching maturity. In terms of innovation, what do we need to see over the next three to five years to maintain and potentially grow the slot portion of the casino business?
Wilson: One of the biggest impacts to the casino business is social gaming. It is prevalent. It is an industry that has come out of nowhere. To think that you are not competing with this space monetarily online is blind. Players only have a certain amount of discretionary income and how they spend it, whether it is virtually or in a casino, matters. So I think for casinos to remain relevant and remain the player’s preferred means of gaming, we have to create an experience that they cannot get on a mobile phone. I think what you will see from Aristocrat and a lot of other manufacturers are these…big, oversized pieces of hardware. The experiences you get on those games can’t be replicated in a social gaming format. That is something we are focused on as a supplier.
I also think we have to give the player a little bit of money back. Return to player [RTP] is a big debate in the marketplace right now. If you look at the combination of volatility and the cost to cover RTP and the way it has developed over the past five to 10 years… it has really decimated the player experience. We need to make sure we are creating value for players and customers, and make sure we create an experience that is meaningful for them.
We are in a war of convenience—there are so many ways for people to spend discretionary income, and gaming is only one of those. We have to remain competitive, not just with the casino down the street, but with other forms of entertainment.
Luquet: I think this is one of the biggest ways in which gaming is changing…to attract a player long-term is an entirely different curve than it used to be. People are less impressed with technology that is not significantly engaging. With the social media games and things like that, we have created some brands and themes on slot machines where we have tried to emulate those games… but we are restricted by the regulations in jurisdictions where we try to place these games. I think those are some of the things we will start seeing differently… that as gaming grows, people will find ways to work within those regulations; maybe in some of these jurisdictions, the regulations may even change to better accommodate the play types of future slot players.
Davidson: I think a number of manufacturers have been really focused on creating games for a younger audience that isn’t typically visiting casinos in large numbers these days. While I think it is important to be doing that, some have literally done it to the detriment of good games people want to play now. I would like a balance there, and I think some manufacturers have gone more one way than the other.
Even when they have been designing games for that younger guest, they really haven’t done a good job in marketing them. With social media… a lot of manufacturers have really struggled with getting the world out and then creating a program allocated toward them. That is an area they can improve upon.
I also think there are also areas, little segments and niches of games that could be re-energized. For example, I had pretty much given up on low-denom mechanical reels until the Innovator and the Innovator Deluxe schemes from Aruze came out and they totally re-energized that segment.
I think there are other opportunities to look at those things and make sure that we are hitting all these different segments. I think there are opportunities for the mid- to high-denom games we used to see from companies like Barcrest and IGT.
Treadway: I echo what Warren said. For years, vendors have focused so much on the lower-denom that they really haven’t done anything for the 25 cents and up players. I would like to see a penny-style bet and bonusing structure built off of a dollar or quarter game, where the player is to increase bets into the $1.50, $2.50 or $5 range. They will bet it, but you got to give them something… there has got to be a reward for that level of bet.
Some of the manufacturers have started to dabble in this type of machine and I am really happy to see that. Hopefully there is some success in that market.
Do cabinets still matter? From an operator standpoint, what is working and what would you like to see? From the vendor perspective, what should we expect to see from you guys?
Wilson: Traditionally, Aristocrat’s focus has always been about the game, its math and its content. But we had an awakening about three years ago that curb appeal matters. When players are walking the floor deciding what game they want to play, the way a cabinet looks does matter to them.
It used to be you show up to G2E and if a manufacturer had a new cabinet it was an exciting thing. Now it is basically a requirement… every manufacturer turns up with new hardware.
Luquet: From a technological and innovation standpoint, I think we will start to see more games that are more energy efficient. Those are abstract things we don’t talk about a lot… I don’t think people realize how much expense we create when we have 2,000 units to the floor and they are burning a lot of energy. We have a machine with the only leadership environment design (LED) cabinet currently on the market. I think that is the kind of thing a lot more manufacturers will eventually emulate.
Davidson: For a new game, the cabinet is very important. If it doesn’t have a fashionable cabinet, the game may not be a success. We have so many big, beautiful games that are so attractive that anything that is new that does not stand out is really at a handicap.
We are competing with other forms of entertainment and when you are talking about online gaming proliferation… if you are playing your slot game on an iPad, there is now way to recreate that experience playing that game on a 42-inch touchscreen with bells and whistles and all that. A great slot cabinet really creates energy on the casino floor. It is one of the reasons why people want to be out of the house, and want to be somewhere exciting.
Treadway: The variety of cabinets makes a difference, especially in some of the larger venues where they have got a couple of thousand plus games. You need that variety of appearance… you need it between your different gaming segments. You want a different appearance in your high-limit room than the rest of the floor.
What I am hoping will happen is that the guts of these cabinets will become uniform and interchangeable. I would like to see that the same power supply works for all a company’s different games, the same CPU, the same monitors, things of that sort. That would reduce our inventory and make it easier for the technicians and slot attendants to work on the games.