Home Where is the Money? Part 6 of 36: The Rise of the Innovator

Where is the Money? Part 6 of 36: The Rise of the Innovator

Authors’ Note: The article looks at the role of innovation in gaming and a massive sea change in the gaming vendor landscape. This massive sea change will change how the industry innovates, and the effectiveness of this innovation will in many ways define the vibrancy of the industry in years to come. This article revisits horizontal innovation and how it will be applied to the gaming landscape.

“The most effective way to manage change successfully is to create it. One cannot manage change. One can only be ahead of it. In a period of upheavals, such as the one we are living in, change is the norm. To be sure, it is painful and risky, and above all it requires a great deal of very hard work. But unless it is seen as the task of the organization to lead change, the organization will not survive. In a period of rapid structural change, the only ones who survive are the change leaders. A change leader sees change as an opportunity. A change leader looks for change, knows how to find the right changes and knows how to make them effective both outside the organization and inside it. To make the future is highly risky. It is less risky, however, than not to try to make it. A goodly proportion of those attempting to will surely not succeed. But predictably, no one else will.’’—Peter F. Drucker1

We are defining horizontal innovation as “innovative technologies on the gaming floor that apply broadly across multiple gaming devices.” These horizontal innovations are often applied to the whole gaming floor at one time. In other words, the end customer experience is, in many cases, a mixture of influences from many suppliers. Consider customers today. They can play on a game made by one game designer on a gaming machine made by one supplier, using a customer management experience and secondary gaming device from a second supplier, a bonusing system from a third supplier and a ticket printer from a fourth supplier. The customer experiences the gaming device as a whole, and simply has no idea that the gaming experience is provided by an amalgam of suppliers.2 Before we dig further into the implications of this model for gaming, let’s first look at how this model has worked in related industries in the past.

The Video Gaming and Arcade Industry
The video game industry is an extraordinary example of the emergence of a new technology and how the entire industry subsequently grew and changed. It also illustrates how change often impacts an entire industry rather than specific players. Now there is little doubt that the video game industry has thrived and, according to Gartner, reached $93 billion in 2013.

The arcade industry, however, has suffered a different fate. In the early 1980s, the arcade industry was having a golden age, having developed into a $14 billion industry in the space of just a few years.3 However, today video arcades make up a small fraction of what they once were, though with a few notable exceptions.

In the late 1970s in Little Rock4, Ark. Buster’s restaurant sat side by side with Dave’s arcade. In the height of the video arcade golden age, these businesses decided to merge offerings to become Dave & Buster’s. This is a clear example of change leadership showing that the combination of products could be a winner. While the arcade industry collapsed, Dave & Buster’s thrived by staying ahead of the change, proving the value of being a successful change leader. (By the way, both of us authors love to visit Dave & Buster’s to enjoy their special offering.)

What is even more interesting is that this innovation in building Dave & Buster’s was a clear example of horizontal innovation. To be specific, it was not the gaming product on its own that enabled Dave & Buster’s to thrive—it was the combination of entertainment offerings that bought about this success, a perfect example of horizontal innovation.

The Restaurant Industry
Despite the Great Recession and the sophistication of take-home prepared meals, the restaurant industry has thrived over the last decade. According to the National Restaurant Association, 2014 sales are forecast to be $683 billion in 2014, up 3.6 percent over 2013 (see Figure 1).5

Figure 1: Restaurant Industry Revenue
Figure 1: Restaurant Industry Revenue
The growth figure is quite remarkable, and the big question is why? Looking at the industry a little deeper shows that it has undergone tremendous change—and that innovation seems to driving the entire industry. Events such as the Restaurant Innovation Summit6 are showcasing new technology, such as innovative new menus, mobility in the restaurant and the application of big data. (It is also worth mentioning that the National Restaurant Association is leading this event.)

Without significant research, it is not possible to say why the restaurant industry seems to be embracing innovation, but there is little doubt that innovation is driving success in the industry.

A Change-leading Industry
The world is changing at a rate that is nothing short of astonishing, and entire industries are emerging and dying. It is prudent, then, to heed Peter Drucker’s advice: “In a period of rapid structural change, the only ones who survive are the change leaders.”7 However, the form of this change leadership is of critical interest. Let’s consider two different forms of innovation.

Change-leading Organization
The first is where an individual company, such as Dave & Buster’s, leads the change. Now, it is dangerous to say that innovation can bring about success in any industry, and in the case of the amusement arcade industry, it could be that the shift to home gaming systems was inevitable. However, it is clear that innovation was a key factor in determining who survived the shift.

Change-leading Industry
The second is where the entire industry becomes a change leadership industry. The restaurant industry is a great example of this; it has grown to now employ 10 percent of the U.S. workforce, and it is an industry of tremendous and constant innovation.

The critical difference between the change-leading operator and the change-leading industry is where the growth comes from. In a change-leading operator, the growth can—and often does—come from other competing operators. In a shrinking industry, it might be the last operator standing. Conversely, in a change-leading industry, the entire industry grows.

In the gaming industry, we think it is reasonable to say that we are competing with other entertainment offerings.

The Innovation Spend
Innovation is a remarkably expensive exercise in which enormous capital amounts are deployed. As shown in Figure 2, the R&D spend by industry in the U.S. ranges from 1 to 13 percent. Two standout non-software industries are the automotive and industrials industries. Both of these industries are now investing 4 percent of their revenue on R&D. It is reasonable to expect these industries to show substantial growth in upcoming years.

Figure 2: Innovation Spend (Sample of Industries (USA))8
Figure 2: Innovation Spend (Sample of Industries (USA))8
Now, the numbers are not small here. The automotive industry spent $17 billion in R&D in 2013. This massive investment shows how this industry is committed to change—and that, in all likelihood, consumers will have some interesting choices in vehicles in the next few years.

The Innovation Soup
Let’s bring all this together with what we think are the key characteristics of innovation:

a) Industry change leadership is more desirable than operator change leadership. If the industry functions as a whole to drive innovation, the whole industry can and often does grow as a result. In other words, it is better to grow the pie than to carve up a smaller one.
b) Innovation requires a risk-taking culture. Risk taking is fraught with failure—and learning from this failure. To quote Thomas Edison, “I have not failed. I’ve just found 10,000 ways that won’t work.”
c) Innovation is expensive, and other industries are investing heavily in change. Many of these industries are competing for the same entertainment dollar as the gaming industry. For example, people may choose an innovative new dining experience over a gaming experience (though of course we would encourage them to enjoy both).

This brings us to the soup that is necessary to bring about growth in an industry; this innovation soup will require a lot of hard work, money and commitment to change leadership. So, let’s get specific about some things that can be done in gaming to bring about this change.

Game Replacement
The slot machine is the backbone of the U.S. gaming market, so let’s take a look at the innovation in this critical part of the industry first. There are about 850,000 slot machines in the U.S. gaming market today.9 To gain an understanding of where the industry is headed, let’s run a simple scenario of replacement and see what the industry could look like in 2024. Assuming a replacement of 50,000 units and a random replacement pattern (this is not unreasonable, as oftentimes properties with newer games replace those games), we get the results shown in Figure 3. Our simple scenario shows that every year we add approximately six months to the mean age of the games.

Figure 3: Estimated Gaming Machine Age
Figure 3: Estimated Gaming Machine Age
Clearly, this not a sustainable model. We cannot expect players to continue to partake in gaming entertainment activities when the product just keeps getting older. Of course, there are some exceptions for games that seem to be classics such as video poker. But these exceptions aside, the answer is clear: The gaming floor needs to become the center of innovation.

Gaming is in many ways much like the restaurant industry in that it is very fragmented. It is not uncommon to find a casino that is a standalone business and not affiliated as part of any chain. In this environment, oftentimes the innovation comes from vendors and a multitude of high-growth companies with new innovations hope to bring about massive change in the industry. In this role, the vendors are like catalysts for change in the whole industry. A successful vendor may actually change the whole way the industry operates and bring us the innovation we need to be change leaders.

This creates a strange symbiosis whereby operators, who must bring about change leadership to grow and thrive, partner with vendors on risky projects that might (and oftentimes do) fail to drive the change needed.

The gaming vendors in many cases are spending aggressively on R&D. What the vendors need are operating partners to be “early adopters” of new innovative technologies. These early adopters will also have the ability to shape and mold the future of these new technologies and, in addition, will have a competitive advantage over operators who are slow to adopt change. In the short term, we will see many small change leaders of the first type (organizations) acting as early adopters for change technology of the second type (industry). In the long run, these early adopters will be the catalysts for a more sustainable level of growth in the gaming industry.

Standards are incredibly important in this whole mix, and we are fortunate to have organizations such as the Gaming Standards Association that are fighting every day to create an environment where the technology platform (and now the regulatory platform) are consistent and common across operators. This common platform is a platform for innovation and change leadership where ideas can be tested and concepts deployed, and the whole industry is able to benefit from the new technologies.

The Opportunity is Ours
The good news is that we are working in a comparatively cash rich and growing industry. This industry is constantly changing and evolving to meet new market changes. However, we now stand at a critical crossroads at which operators and vendors need to take more risks, learn from their failures, and bring about the industry change leadership that will ensure the future of the industry remains bright.

1. Drucker, Peter F. (2009-10-13). The Daily Drucker (p. 69). HarperCollins. Kindle Edition.
2. http://www.casinoenterprisemanagement.com/articles/july-2011/where%E2%80…, Cardno, Thomas, DeRaedt.
3. Day, Walter (February 8, 1998). “Chapter 01 – The Golden Age of Video Game Arcades”. The Golden Age of Video Game Arcades. Twin Galaxies.
4. www.daveandbusters.com/about-us.
5. www.restaurant.org/News-Research/Research/Forecast-2014.
6. www.restaurant.org/Events-Networking/Events/Restaurant_Innovation_Summit….
7. Drucker, Peter F. (2009-10-13). The Daily Drucker (p. 69). HarperCollins. Kindle Edition.
8. www.strategyand.pwc.com/global/home/what-we-think/global-innovation-1000….
9. www.cbsnews.com/news/slot-machines-the-big-gamble-07-01-2011.

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