Home Where’s The Money Now? Part 8 of 18: Product Adoption Curves

Where’s The Money Now? Part 8 of 18: Product Adoption Curves

Before we continue forward with our investigation of new technologies’ adoption curves, let’s take a look at what we’ve already learned in a brief recap of our key concepts from recent articles.

Consumer Adoption Curves
As discussed in Part 7 of “Where’s the Money Now?” the speed of consumer adoption curves seem to be largely invariant over history. Although consumer adoption curves are often said to be dramatically more rapid in recent years, our key observation is that, despite the hype, consumer adoption curves seem to have remained unchanged for 60-plus years. This counterintuitive observation is exemplified by the adoption curve of the radio, which has a similar adoption curve to the computer. However, there are many more rapid adoption curves today, and the technologies of today generate data at a staggering rage.

Adoption curves are very important in the gaming world right now as we try to anticipate the impacts on the industry from technology change, ranging from online gaming and new gaming machines to other horizontal innovations (as we discussed in the July 2011 issue of CEM).

Black Swan Games
In the August 2012 issue of CEM we described “black swan games” and how these are games so extreme in their performance and so long in their life cycles that they define a gaming market. Aristocrat’s Buffalo is one such game that continues to dominate many casinos; in fact, there are properties that have upward of 20 percent Buffalo product. Aristocrat, possibly in recognition of its brick-and-mortar success, has released an online version of the same game.1 Now the question is, what is the life cycle of this gaming product? More importantly, how is the life cycle of this product changed by the fact that it has been released online? We will strive to answer these questions later in this article.

Growth in Gaming
In the July 2013 issue of CEM, we showed that adoption curves of general consumer products can be incredibly varied, ranging from the remarkably quick and near complete adoption of color TVs to the slow adoption of the dishwasher. What is interesting is that most new technologies do continue to increase in market penetration over time and generally do not decrease.2
Figure 1: Commercial Casino Growth Curve3
Figure 1: Commercial Casino Growth Curve3

The growth in gaming machines around the world is a player in the story of the continuous construction of new properties in new locations around the world. Another player in this story is overall revenue growth. It seems that we are now past the 2007 dip and revenues will continue to increase over time. The bigger questions now are, what will be the growth of online gaming revenue and how will this affect traditional casino businesses?

According to the American Gaming Association (AGA), Americans are estimated to have spent nearly $4 billion wagering online in 2011—despite the Unlawful Internet Gaming Enforcement Act (UIGEA).4 This number is about 10 percent of the commercial market and is clearly near the bottom of the adoption curve. Estimates about the potential for growth in this market vary wildly, but given the now likely widespread legalization of online gaming, the AGA interviewed 18 experts and estimated that revenue will be between $10 billion and $15 billion in five years. If this is accurate, then we would expect online gaming to follow a similar adoption curve to technologies such as the Internet and be at its peak within 10 years.5 We could wildly estimate that this peak will occur at around the same number as the current commercial casinos. This $30 billion number is illustratively consistent with the AGA’s Future Watch Volume 10, which includes worldwide estimates of $60 billion in 10 years.

This online gaming estimate is interpolated from the AGA’s interview figures. What is interesting is that the online experts, who were unnamed, estimate extreme growth in the online gaming world—assuming widespread legalization. Brick-and-mortar operators might start to feel the impact of online gaming when the market reaches about $10 billion, but we can expect that all operators will be deeply aware of online gaming once its revenue reaches $30 billion and the online gaming market is essentially the same size as the current commercial casino market.

Now let’s dig deeper into the impact that online casinos could have on commercial brick-and-mortar casinos, hereafter referred to as B&M casinos. In the December 2012 issue of CEM and in related articles, we discussed the cannibalization of slot machines, noting that adding a high-performing slot machine can sometimes have a negative impact on other machines on the floor. In a similar manner, online casinos are likely to have a cannibalization effect on B&M casinos. Right now, online casino revenues are small compared to B&M revenues, and likely the customers who choose online businesses are dedicated to online gaming; thus, cannibalization is likely low. However, as online businesses grow over time, it is likely that an increasing share of revenues will be cannibalized from B&M casinos. For the sake of the estimates in Figure 2, let’s assume that currently 30 percent of online revenues are cannibalized from B&M casinos, but that percentage will grow to 50 percent in 5 years and to 70 percent in 10 years. In addition, let’s assume that without the presence of online gaming, B&M casinos would continue their recent trend of 3.3 percent annual growth.

Looking at the table and chart in Figure 2 below, we see the expected growth in online revenues as forecast by our AGA experts. What is interesting is the impact of online revenues on B&M revenues. In 2013, at 30 percent cannibalization, the
$4 billion in online revenues is only cannibalizing $1.2 billion of B&M revenues, or 3 percent of the overall B&M business. However, in 10 years that number jumps to $21 billion, or 39 percent. And instead of growing, the net impact of online gaming causes the B&M business to actually decline from 2018 to 2023. To be sure, if online gaming does as our industry experts think it will, the commercial B&M casinos will have no choice but to take notice. Of course, these estimates are illustrative only and should be taken with a pound of proverbial salt.

The Adoption Curve Challenge
The challenge with adoption curves is that initially (say, for the first five years), they have little impact on traditional businesses. However, in the long term, the impact is enormous. As we saw in Figure 2, if the AGA estimates come to fruition, the online world will be a massive part of the gaming community in 2023 and, as we illustrated in Figure 2, may well cannibalize B&M casino businesses.

Moving forward with these figures in mind, we can look to two industries to see how the online world has already impacted the B&M: the book industry and the movie theater industry. In the book industry, you do not have to look much further than the story of Borders Books’ bankruptcy and liquidation to see the impact that online businesses can have on brick-and-mortar businesses. The nature of adoption curves means that it is easy to underestimate the impact of new offerings in the short term, although the long-term impact is hard to avoid.

The movie theater industry is a completely different story, as this industry grew 1.4 percent from 2008 to 2013.6 This continued growth is seen despite amazing changes to the viewing landscape and seemingly endless online and mobile choices for home entertainment. This shows that it is possible for online and brick-and-mortar businesses to work together.

Figure 2: Possible Impact of Online Gaming to Brick-and-mortar Gaming in the U.S.
Figure 2: Possible Impact of Online Gaming to Brick-and-mortar Gaming in the U.S.
The 30 Billion Dollar Question
Before we further examine the online and B&M business relationship, it is important to note that in the highly regulated online gaming world, it is reasonable to expect some big shifts in the adoption curve as different regulatory events occur. Nonetheless, the $30 billion question remains: If there is a $30 billion online gaming market in 10 years in the U.S., will the B&M casino businesses be cannibalized?

As we saw in Figure 2, it’s possible that online casinos could cannibalize B&M casinos by as much as $21 billion, causing B&M business to decline by $1 billion per year over five years. The follow-up question is, how can the industry position itself to greet the change more like the movie theater industry, where the massive shift to online entertainment has actually been beneficial?

This question is only touching the surface of our online casino analytical challenge, but there are some tactical questions that we can ask that will help us see what is happening in the early stages of the online adoption curve. Digging into these tactical questions, we can begin to understand the evolution of the gaming business going forward and adapt accordingly.

Tactical Question 1: Major gaming manufacturers are providing online options for games that are proven in B&M casinos. How does this affect the life cycle of these games? For example, with the release of a black swan game such as Buffalo into the online gaming world, how can we monitor its synergy or cannibalization?

Tactical Question 2: How does the life cycle of a new game change when it is released in both an online and a B&M casino, as compared to first being released in a B&M casino?

Tactical Question 3: Should the B&M casinos have a similar business model to the movie industry, in which titles are first released into B&M locations then later released into the online world?

As always, data is the key to the future, and it is key to answering these questions. Access to data will be a big challenge for any B&M operator that lacks an online presence, while those companies that are able to maintain a B&M casino and an online casino in the future will be equipped with the data they need. Consider, for example, the release of Buffalo into an online casino. An operator who has the data can measure the impact of the online Buffalo game on the B&M version of Buffalo. The operator can see if the customers who play B&M Buffalo simply move their play to the online version (cannibalization) or if the availability of the online version causes them to increase their overall loyalty to both the B&M Buffalo and the casino (synergy).

Horizontal Innovation and New Products
The adoption of traditional gaming machines in the online world is also running parallel with the introduction of new technologies that are far more suited to the B&M gaming world. In our CEM series of articles on horizontal innovation, we described how horizontal innovation “brings home the bacon. It has been proven to do so in the past, and we think in the future it will continue to provide significant opportunities for driving value across the gaming floor. Furthermore, the traditional vertical innovation that the industry has, in many ways, relied on for years is now suffering from cannibalization.”7

As the growth of international markets continues, companies such as SPIELO are able to move into relationships with larger operators, such as Kangwon Land in South Korea. SPIELO, which was previously largely confined to smaller European-style properties, now has the opportunity to compete with the traditional U.S. systems providers in larger casinos. In the May 2005 issue of the Quarterly Journal of Economics, it was shown that competition among equal players drives innovation. This creates an interesting situation whereby companies such as SPIELO are able to be more “equal,” as their international markets are now comparative to the U.S. market. Following this, we would argue that this trend will drive more innovation in the industry. Consider, for example, the SPIELO jackpotting system, Galaxis Jackpots. This innovative product is likely to find its way into the U.S. market as it has now proven itself to be able to operate in the larger footprint size that previously only existed in the U.S.

In addition to horizontal innovation, there are huge shifts in the types of gaming machines that are available. For example, there is little doubt that the innovation in electronic table games (EGTs) is being driven by the huge success of these products in the Macau marketplace. One of us authors recently visited Macau, and witnessed huge footprints of ETGs being deployed there. These ETGs are rapidly maturing as products. We predict that the 2013 Global Gaming Expo in Las Vegas will be loaded with vendors showing these new product lines and, in many cases, with new internationally successful vendors hoping to compete in the North American marketplace.

Bringing It All Together
The gaming world is in the midst of a huge change, with the mostly illegal online gaming market in North America already accounting for 10 percent of the commercial gaming market there. The experts agree (and only time will tell if they are right) that this online gaming world is in for 10 years of explosive growth. The big question is, how can the brick-and-mortar industry adapt its market presence to thrive in what will be a very different gaming landscape?

People like to go out and people like to be entertained; and completely new product lines and horizontal innovations are making the gaming floor far more entertaining than it has ever been. In addition, horizontal innovation is bringing in entirely new types of players. From Texas Hold’em to electronic table games, exciting new gaming options are helping ensure brick-and-mortar casino businesses continue to thrive in this new world.

1 See http://www.gamingslots.com/slots/aristocrat/buffalo-slot/ for a review of the online version of Buffalo.
2 Extracted from http://www.nytimes.com/imagepages/2008/02/10/opinion/10op.graphic.ready…., May 2013.
3 Data extracted from http://www.americangaming.org/industry-resources/research/fact-sheets/ga… June 2013.
4 http://www.americangaming.org/sites/default/files/uploads/docs/futurewatch/
5 http://www.cbsnews.com/8301-505266_162-57586584/nevada-looks-to-cash-in-….
6 Refer to http://www.ibisworld.com/industry/default.aspx?indid=1244 for movie industry growth information.
7 “Where’s the Money? Part 1: Horizontal Innovation and Gaming Standards”, Cardno, Thomas and De Raedt, July 2011, Casinno Enterprise Management.

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