It is that time of year again when gaming executives for gaming operators and technology suppliers alike join together at G2E to examine new products and discuss industry themes. There is plenty to see and discuss at G2E 2011. Suppliers will have plenty of new products and ideas to share with the industry. Discussions on how to deal with industry headwinds will be insightful; topics may include dealing with anemic growth, saturation from market expansion and changing demographic patterns of the gaming consumer.
With that in mind, you will find seven themes discussed below that were designed to shine additional light on your pre- and post-G2E perspective. We hope these themes will help you think about the future, as I believe the future is challenging and exciting all at once.
Without further adieu, here are the themes.
Exhibit A: Framework for Rethinking Communication and Service Elements
Exhibit A: Framework for Rethinking Communication and Service Elements
Improved interoperability between gaming devices, systems and applications will enable innovations in player experience.
Over the last decade, the gaming industry has been struggling with convergence and interoperability. At the core of this convergence is a desire for the gaming device to have personalized functions, such as player account management, individualized game features and access to applications that improve the overall player experience. The player account functions have normally been the domain of the casino management system, and game features have been the domain of the slot game device. In the future, we see these domains becoming blurred, and with that activity we see new opportunities to innovate. New innovations will allow game designers to create episodic content whereby the players can recall their state at a future point in time and allowing operators to market to players based on their status in the game. The game will help reward players for persistence and loyalty to games and casinos by storing and retrieving their accomplishments. Applications that will improve the overall player experience will require access to the slot machine and to the data held in the transaction systems.
Protocols like G2S (Game to System) and S2S (System to System) were intended to promote innovation by creating a more open and standard means of communication, but the adoption of these protocols has been slow and an innovative convergence has yet to occur. Looking to history, the important innovations behind TITO, bonusing and player tracking could not have happened without communication protocols between the game and the system. For example, the adoption of SAS 6.0, a GSA-recognized standard that enabled TITO functionality, was one of the fastest. Operators demanded games with TITO systems. Game suppliers implemented the protocol because immediate sales opportunities were dependent upon the adoption. System providers adopted SAS 6.0 to perform TITO accounting because system sales were becoming dependent on having the functionality. The large-scale replacement cycle of games enabled SAS 6.0 to become the dominant protocol in the industry.
Future innovation in our industry is heavily dependent on convergence. We see the innovation in the industry dependent on the accelerated adoption and implementation of industry standards in order to bring about infrastructure that can enable innovation. It is not clear that G2S and S2S are flexible and modern enough; however, they are certainly better than the current standards. Convergence requires game suppliers to allow greater communication capabilities without a replacement cycle to justify the protocol changes. System suppliers need to paint a picture by creating novel applications that take advantage of convergence without always requiring a wholesale change-out of the transaction system. Operators need to demand the availability of these standards in the purchasing decisions and that these standards can be used by third parties. Our customers are seeing it in other industries; they need to see it in gambling too.
Will operators look to increase the number of revenue participation games on the floor?
Growth in average sales price (ASP) is increasing faster than capital availability and revenue growth in many parts of the gaming industry. In addition, many operators are focusing on return on invested capital and marketing initiatives. A major operator was recently quoted by an analyst as saying that it was better for them to invest in more marketing than newer slot machines. The ASP on slot machines today is about $15,877.1 In 2007, the ASP was about $12,675,2 and if you go further back, operators spent $9,000 to $10,000. With ASP on a new slot machine approaching $20,000, the participation pricing model appears to have a lot of advantages in today’s dynamic marketplace.
Of course, industry norms of capping participation machines at 3 to 4 percent of revenue complicate this theme. Challenging this norm is not an easy task, nor is it one for the faint of heart. It is complicated because it is difficult to measure expected outcomes versus reported outcomes. It is easier to frame the payment of participation fees as a cost rather than as an expense that is creating incremental revenue production. It is also difficult to develop a model that compares the return on invested capital when buying a slot machine versus a participation expense.
Participation pricing models should become more attractive for the following reasons: 1) the avoidance of product and technology obsolesce; 2) the opportunity to increase the quantity of new slot machines and the frequency at which they are refreshed; 3) the scarcity and cost of capital, which makes participation and/or lease games more attractive; and 4) operators maintain the option of deploying capital for other high return projects. I recently spoke with a gaming executive who turned around his property’s performance in a major way, and one of the tactics he used was refreshing his floor by increasing the number of participation units. He simply didn’t have the capital to buy new equipment, but his aging floor needed to be refreshed. He was able to show that refreshing his floor improved performance and that participation games didn’t cannibalize other games.
Gamification of Consumer Loyalty Programs
The challenge with current loyalty programs is that they use clever point systems and offer discounts in return for consumption. There is also very little differentiation in most loyalty programs in the industry, as companies continue to invest heavily in technology and marketing assets. Unfortunately, once a consumer has redeemed her points, it doesn’t make her more or less likely to choose your venue over another in the future. Loyalty is obtained by creating switching costs and deep emotional connections with consumers. Research by professors at UNLV has shown that gamblers are more loyal to casinos where their friends play, where their friends work, and where they can find the games they like to play. I believe the adoption of features embedded in a concept called “gamification” will be the next big innovation in loyalty programs.
The level of activity that the industry’s core customers provide and the level of data availability in our core transaction systems make this a fertile ground for marketers to differentiate their loyalty programs vs. their competitors’ programs. To accomplish this effect, marketers will need to leverage technology, analytics and consumer insights to design and scale the game components so that they are personalized for the player based on their activity level. The game mechanics and game dynamics need to incentivize the player’s behavior, matching their skills, in terms of activity level, with a challenge that is just slightly out of reach. The technology will need to enable the player to track and brag about their activity.
The gamification of consumer loyalty programs brings two concepts together: game mechanics and game dynamics. Game mechanics can include points, levels, challenges, virtual goods and spaces, leaderboards, gifts, and charity. Game dynamics include rewards, status, achievement, self-expression, competition and altruism. Certainly, we as gaming executives can recognize these features at play in various forms within both loyalty programs and in gaming content that is consumed by our players.
These features provide an opportunity to actuate deep emotional connections and create switching costs over time. This is accomplished by matching the right challenge with the player’s perceived skill to accomplish the challenge, which excites the brain. At a fundamental level, this is why people play games. Setting and hitting milestones results in a repeated sense of accomplishment and boosts the individual’s self worth, leading to satisfaction with themselves and with the brand that has enabled this sense of fulfillment.
Leveraging mobile devices to rethink consumer communication.
It is amazing to consider how, over the last decade, mobile devices have changed our lives. Whether you use a smartphone, iPad or laptop computer, mobility has and is changing the way we live our lives. In 2008, the number of things connected to the Internet exceeded the number of people on earth. It is estimated that by 2013, there will be about 1 billion users of smartphones, which, of course, are connected to the Internet. We have gone from a device that simply enabled conversations to occur in a wide variety of locations and situations to devices that are more powerful than the first personal computers.
I am sure we can all agree that mobile devices present an opportunity to augment the consumer’s and employee’s experience within and outside the casino. So as we consider how we can use these devices to augment those experiences, we need to set aside the usual complications inherent in our industry. Overcoming the proprietary standards and a lack of adoption of industry standards that prevent different systems from communicating with each other is not a trivial feat. In addition, most large gambling conglomerates have applications for smartphones that allow consumers to look at their loyalty information such as the number of points earned. However, this implementation is just the beginning and barely leverages the capabilities of these devices. Therefore, we raise the question, can we do more? If so, how should a gaming executive think about leveraging this important consumer behavior?
I believe that Exhibit A provides a basis for thinking through how these devices can be deployed to enhance communication. The framework identifies three key concepts:
1) Tracking behavior – monitoring the behavior of persons, things or data through space and time.
2) Knowledge of the situation – achieving real-time awareness of the situation.
3) Assist consumers and employees with a decision – assist human decision making with deep analysis and data visualization.
It is at the intersection of these activities that new applications and new service elements can be created that enhance the consumer’s experience.
Exhibit B: Basic Building Blocks of Web 2.0 Site
Exhibit B: Basic Building Blocks of Web 2.0 Site
The industry will adopt Web 2.0 in designing services!
Casino patrons are spending more time on the Internet than ever before. They are participating in wide ranges of activities that make them feel like they are more connected to others and like they have greater control over their lives. According to WMS, North American gamblers are spending 31 percent more time online than they did in 2005, and more than one in four gamblers are active in online chat or discussion forums. It is unclear whether they are spending this time on gaming-related subjects or if the industry is losing players to other activities. Web 2.0 in a retailing sense is about enabling players to share experiences and stories about one of their favorite activities. Exhibit B provides a working definition of the building blocks of a Web 2.0 site.
Beyond the technology and application challenges, the main challenge for the industry is embracing the culture of Web 2.0. In order for chat or discussion forums to function, casinos and suppliers need to trust players, because if players figure out that the medium is being controlled or manipulated, you will lose their trust. The medium cannot be controlled; you can only influence the direction. You have to trust your customers with your message and content. In order to influence the direction, your company has to listen for insights and react to the players’ comments. If you don’t do it, someone else will.
With that being said, leveraging Web 2.0 can be done by acquiring and maintaining new methods of communicating with players, and by catering to the players’ habits in communicating and networking on the web. Web 2.0 infrastructure provides the industry the opportunity to enhance conversations with the player. For example, just adding customer reviews of games to a website may improve the relationship between the players, casinos and game designers. Allowing players to express their opinions and views of games will help others make better decisions regarding games to play, games to promote or purchase, or future games to design.
The following research supports such a view:
• According to BizRate, 59 percent of users consider customer reviews to be more valuable than expert reviews.
• According to McKinsey & Co., about two-thirds of all economic activity in the U.S. is influenced by shared opinions about a product, brand or service.
This is the decade of Big Data, and the gaming industry has more data than ever!“Big Data” is defined as datasets that have grown beyond the abilities of typical database software tools to capture, store, manage and analyze information. Currently, the gaming industry struggles with Big Data. Transaction systems capture data but make it difficult to extract. The data is difficult to manage, and data warehouse applications have been difficult to maintain and operate. Big Data, however, is only going to get bigger, particularly when you think about capturing the data created from marketing in a digital world of smartphones and social media.
The industry should focus on leveraging large and more complicated datasets by using distributed databases similar to those used by Google and eBay; hiring high-end resources internally or via outsourcing agreements to access sophisticated analytical talent; looking to leverage the cloud to reduce the cost of managing the data; and rapidly experimenting with new methods of executing operational portions of the business model to exploit insights generated from the data analytics.
System suppliers and casino operators will embrace the cloud computing business models.
Cloud computing is not a satellite. Cloud computing allows a vendor to locate its software at a central data center. Cloud computing allows the system vendor to unbundle the software from the infrastructure, and security is now strong enough that even Fortune 100 companies are placing their data in the cloud. Conversations regarding gaming systems tend to be complicated for the both the supplier and the operator. These conversations tend to focus on two elements: 1) What is the system or application, and what are its features, functions and benefits? and 2) What are the technical requirements of the system’s server, storage and network components?
The basic advantages of cloud computing are as follows:
1. Conversations regarding the application are focused on how it will add value to your business via the reduction of operating expenses or by creating new revenue opportunities. The vendor manages the infrastructure that delivers the application, while the operator focuses solely on using the application to support its business. The operator no longer has to worry about operational requirements in the data center.
2. The vendor can take advantage of economies of scale by creating its own independent infrastructure shared by all clients or by utilizing third-party sources, such as Amazon.com. Cloud computing enables the sharing of resources and costs among all the various parties involved, such as office space, power, cooling, bandwidth, networks, servers and storage, as the vendor provides them and is incentivized to optimize the capital outlay, which usually reduces costs of application delivery.
3. Other advantages are faster and lower-risk deployment, as well as lowered application-switching barriers; application and hardware upgrades are separated, while at the same time enhancements are made in reliability, scalability and maintenance requirements.
There is no question that the next 10 years in gaming are going to be exciting; not because of dramatic growth as in the past, but because of the changes that will occur due to forces on the market that will be enabled by new technology, new uses of data and innovations in business models. The pace of these changes must accelerate in light of the changes occurring in the broader universe in which gaming consumers participate. For some, these changes will bring new opportunities to unlock competitive advantages; for others, dealing with these disruptive changes will be a major challenge.
I believe these seven themes are important to watch and understand to properly set the context for your organization, and to also identify participants in these themes that may help you seize the moment. I look forward to participating in these conversations with you.
1 Average based on Roth Capital Partners Market Share Trends & Operating Metrics for 2Q CY11
2 Average based on Roth Capital Partners Market Share Trends & Operating Metrics for 2Q CY11