Status Quo or Value Proposition? I-Gaming’s Impact on Standard Slot Machine Sales

Walking this year’s G2E exhibit floor, you surely saw the rows of gleaming, towering new slot machines. But did you notice the sheer number of vendors offering i-gaming solutions? We sure did, and it’s not surprising, as Internet gaming continues to pervade our industry’s landscape. It did, however, get us thinking about the elephant-in-the-room question: As i-gaming continues to grow, what will happen to standard slot cabinet sales?We asked the vendors themselves if they’ve started to feel or see a difference. Those we spoke to weren’t anticipating a significant impact in the short term. While they believe Internet and mobile gaming will affect sales over the next five to 10 years, they believe their content is compelling enough to maintain cabinet sales while the i-gaming market defines itself. Furthermore, they believe casino executives understand and appreciate the delivery devices they provide and will continue to support their emerging product lines.

We humbly disagree.

While we believe that casino operation executives do support and appreciate the various manufacturers’ efforts, we know their first priority is ensuring a profitable and sustainable operation. And these days, that’s hard to do. The cost of operating a casino continues to escalate unabated. The costs of goods and services, wages and health care continue to increase while the average customer spend continues to decline. Shrinking capital budgets and the ever-rising price of standard games and systems force operators to do more with less, and the value proposition i-gaming offers certainly beats the status quo. Plus, if it’s content that drives the vendors’ cabinet sales, do actual delivery devices truly matter?

The Economics of Content Choice
How many of your players could tell you which manufacturer makes their favorite slot game? What about the brand name of the TV they have in their family room? Most consumers choose the best device available within their allotted budget. When we watch our favorite shows, the content and quality of the programming trumps the brand of the delivery device, and likewise, when players play their favorite game, the quality of the overall experience trumps the cabinet it was delivered through.

If content is key, it stands to reason that if an equivalent delivery device is available at a significant savings, simultaneously offering richer content at a lower price, any consumer would be compelled to investigate its possibilities. The same holds true for casino operators.

This morning in California [as of this writing], the cost of a regular gallon of gasoline averaged $4.67, with a warning that prices are estimated to rise to $4.85 before any drop is expected. The effect that fuel prices have on the average family is substantial and far ranging. Not only is their ability to travel impeded, but the cost of food, clothing and basic necessities will rise as well, significantly cutting into the discretionary income of the majority of our regular customers.

These regular customers are our bread and butter, and while their discretionary income may dissolve, their need for entertainment does not. Instead of spending $100 at their local casino for an hour of entertainment, they will find more economical ways to enjoy their spare time. One alluring option is free-to-play games.

The world of free-to-play, or “freemium,” games has exploded before our very eyes. You can now find fun, entertaining free apps all over the Internet, from the Apple app store or Android market to Facebook. The root of the word “freemium” implies that these games are free to the consumer, and oftentimes they are indeed free, or at least they are until the user wants virtual goods, added features or functionality, at which point a cost is associated.

A recent study completed by IHS, a global information company, showed that in-app purchases from freemium games generated $970 million in 2011. Other statistics show that 96 percent of applications downloaded onto smartphones are the free versions. That’s $970 million in revenue for free.

Last year, Flurry, a mobile analytics company based in San Francisco, reported that 13 percent of the 3.5 million user-sample completed transactions totaled more than $20 within freemium games. These users accounted for a small slice of the pie but contributed half of the overall annual revenue. This 13 percent of gamers is spending money on Internet games that correlate with no personal monetary gain; instead, they receive the satisfaction of a high score on a leaderboard or virtual badges of achievement shared in social interactive applications.

In addition, the 2010 Social Gaming Research done by PopCap Games tells us that 24 percent of Internet users play social games. Of the 1,202 qualified subjects PopCap surveyed, 95 percent played social games multiple times a week and 34 percent played social games several times each day. Furthermore, 28 percent of the social gamers played their games on mobile or hand-held devices.

The question we must ask after reading these statistics: What can we do to get these freemium social gamers into the casino and interacting online with our brand?

The Economics of Delivery Devices
The vast majority of operators we spoke with at G2E highlighted the need for low-cost, highly reliable mobile gaming platforms that will port the highly successful content of the major manufacturers to affordable delivery devices. They also want these mobile devices to be compatible with concierge-style services that allow the casino to better serve its customers’ needs while expanding opportunities to capture more spend.

What our players desperately want from us is a quality playing experience at minimum cost. They want the value of their casino experience to mirror that of their other discretionary entertainment options. If we can offer a player the same length of playing time as they would get watching a movie for the same cost, the excitement generated by our casinos, coupled with the expectation of hitting a jackpot, would drive them our direction more times than not.

The truth is, as costs increase for operators, the status quo no longer works. In an industry where a giant gaming box costs upward of $17,000, it’s hard to ignore the economies of a $399 iPad.