Market Size and Supplier Share Volatility

The last 10 years have been a real roller coaster for gaming equipment suppliers. I joined Aristocrat nearly 11 years ago, and for most of that time I was amazed at the volatility of not only the size of the market, but also the individual shares each of the main suppliers were achieving.
Purely out of personal interest, I recently undertook an analysis of just how volatile the equipment supply industry has been over the last 10 years. I used publicly available data from the four major gaming equipment suppliers (IGT, Bally, WMS and Aristocrat) and best estimates for the other companies who do not publish their data. This article looks at two key variables that make accurate forecasting and forward planning in this current market environment very challenging—the size of the market and market share.

Size of the Market
I doubt there would be many commentators or industry insiders who would still argue that our industry is somehow “recession-proof.” The evidence is clear that it certainly isn’t. Graph1 is a summary of the estimated total number of units sold by all gaming equipment manufacturers into the North American market (including U.S. and Canada). For gaming equipment suppliers, this is the size of the outright sales market, and it is normally broken up by suppliers into two pieces—the replacement market (swap out of units on a casino floor) and the opening of new casinos and/or expansion of existing casinos.

Graph 1: Total Units Sold into the North American Market
Graph 1: Total Units Sold into the North American Market

In 2003 and 2004, as major new markets opened up and gaming rapidly expanded across North America, the number of units sold were the highest in the last 10 years. The years 2006 and 2007 were also healthy with new openings and a replacement market in the mid 60,000 range for both years.

Fast forward to 2010 and 2011, and the total market size is easily the lowest of the last 10 years—down more than 50 percent on 2003 levels. The replacement market has definitely dropped, but probably not by the amount you may have expected. In 2010 and 2011, the estimated replacement market was approximately 51,000 and 53,000, respectively—about 20 percent down on the pre-economic crisis years of 2006 and 2007. What really drove the decline in total market size were the fewer new market/jurisdiction openings and casino expansions in the years 2008-2011. The good news is 2012 will see a rebound of this segment of the market given all the recent activity in places like Ohio and Maryland—but it still will not be back to the new opening numbers of 2006 and 2007.

When forecasting, you need to make an assumption on the number of units that will be sold into both segments (replacement and new casinos/expansions). Forecasting the number of units relating to new casinos or expansions in a given year is relatively easy, given operators’ plans to complete a new casino and open it are fairly well-known in advance. Contrast this to estimating the replacement unit market, which is much more difficult and—in my opinion—pure guesswork. In the earlier years, the replacement market represented less than half of the total market as new casinos/expansions were significant, and therefore the overall impact of getting the replacement market assumption wrong was less. However, because of the significant drop-off in the number of new casinos/expansions over the last few years, the replacement market has represented more than 80 percent of the total market size, significantly increasing the volatility and risks associated with forecasts and annual plans.

Market Share
There is a lot of focus in the analyst community around individual companies’ share of the total market. It is typically a very important and key strategic assumption used by suppliers to work out their estimated future sales. It is hard to get a 100 percent-accurate like-for-like company comparison of performance, however once again using publicly available data, I have attempted to reconstruct market share over the last 10 years. Similar to the market size changes above, it is staggering to see the volatility of share between the major players.

Early last decade, there was no doubt who the dominant player in the market was—IGT. Achieving a 60 percent-plus share in an industry is no easy task and speaks volumes to the quality of product and innovation being produced by them at that time.
As lower denomination products started to take hold and demonstrate to operators their appeal to players and (more importantly) profitability, market share power started to shift. Bally, WMS and Aristocrat all started to take bigger shares. A number of important observations can be made from Graph 2:
Graph 2: Supplier Market Share
Graph 2: Supplier Market Share

• Bally, WMS and Aristocrat have been on a market share roller coaster over the last 10 years. All three companies have demonstrated that while they were able to grow share at some point over the last 10 years, it was very difficult for them to sustain that growth. In fact, the longest stretch of consistent annual share growth in the last 10 years was by WMS between 2006 and 2010.
• Other than IGT, nobody has been able to break the 30 percent annual share barrier, although some companies have done it in an individual quarter.
• The accumulated share being achieved by the “other” suppliers has also increased significantly from being only around 5 percent of sales in 2003 to an estimated 18 percent of sales in 2011. This growth has largely been driven by new focus on growing North American sales by companies such as Konami, Multimedia Games, Aruze and recently AGT. The growth in this other segment demonstrates just how competitive the supply industry is now.

Once again, the challenge for suppliers as they put together their annual and strategic plans is to accurately predict what share they will be able to achieve. The roller coaster most of them have been on combined with the growth in the “other” segment is making this more challenging.

Final Thoughts
We normally hear on earning conference calls and industry briefings just how volatile the equipment supply market is. Hopefully the two relatively simple pieces of analysis in this article demonstrate the volatility in both the size of the market and the share of it that individual suppliers will get. One should also keep in mind that this article only discusses two variables (market size and share), and of course there are many more variables that need to be considered and factored into forecasts and plans, including: product release and approval schedules, promotion effectiveness, and of course product performance and quality. Bravery awards should be given to anyone putting out medium term guidance in this new world!

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