Where’s the Money? Part 3: Horizontal Innovation in Gaming Machines, Gaming Software and Casino Architecture

In part 1 of this series, we briefly touched upon the power of horizontal innovation vs. vertical innovation when it comes to gaming product, and we illustrated how a smaller percentage increase in horizontal innovation is sometimes better than a larger increase in vertical innovation. In this installment, we’ll give some specific examples of horizontal innovation that are available today and look into the future at what may yet be to come. First we look at horizontal innovation within a vertical.

Gaming Machines
Many slot machine manufacturers are looking at ways to improve large sections of their product line with horizontal innovation. This is not a new idea—manufacturers have long introduced new cabinet styles and then have brought many of their old themes onto these new cabinets, hoping to see incremental value from all these themes via the horizontal innovation of the new cabinet. More recent efforts following this model involve more sophisticated technology.

One slot manufacturer has released a new horizontal innovation that, among other things, allows the casino to link that slot manufacturer’s games—which previously have been stand-alone and not at all connected—via a single rapid-hit jackpot. The slot operator has indicated that simply adding this linked jackpot to its slot machines leads to double-digit percent increases in the performance of its products. At least one of the authors has verified these claims in the field, and further has noted (with no small amount of surprise) that other non-linked products from the slot manufacturer were not significantly cannibalized by the games with linked jackpots.

There are similar examples of linked jackpots that casinos have invented for their entire gaming product lines. In Las Vegas, one of the local casino giants has a jackpot that links every slot machine, and anyone playing with a rewards card is eligible for the jackpot. In addition, there is a “celebration” award so that when the jackpot hits, everyone playing at that time gets a fixed award of promotional credits. This horizontal innovation has been running for a number of years, and was so successful that the company expanded it to cover games other than slot machines. While we have not seen any specific analysis to demonstrate the level of profitability of this program, it is known that this company has one of the highest percents of rated play (i.e., the percent of total play that comes from customers using their rewards card) in the industry.

Gaming Hardware
Gaming hardware is a fundamental component of the gaming offering—walk into a casino today, and you don’t have to look past the massive Wheel of Fortune games or the huge LCD screens with animated fish swimming on them. The great challenge with these features is that specialized hardware is oftentimes combined with the game to make a unique offering.

Gaming Platform
The gaming platform enables a vast array of capabilities, including updated themes, enhanced bonusing and secondary gaming devices. These platforms can be enhanced with a wide range of game-specific adornments. These adornments to gaming devices provide all manner of innovations, ranging from bouncing balls to LCD reels. It is the opinion of at least one of the authors that game adornments provide for considerable visual excitement on the gaming floor.

External Systems
External non-gaming systems range from sophisticated messaging systems to music control systems. They are important, as they can provide horizontal “glue” that operates across the whole property.

Pricing Innovation
The pricing of new games is critical to the replenishment cycle of the games. Quite simply, for many operators, innovation in the pricing is required to justify the new gaming machines they normally need.

Gaming Platform
Gaming platforms are now built around gaming standards, and central to these standards is the leadership of the Gaming Standards Association (GSA). The GSA’s stated mission is to “facilitate the identification, definition, development, promotion and implementation of open standards to enable innovation, education and communication for the benefit of the entire industry.” It is these standards that allow the gaming device to run games from different manufacturers. This opening up of the platform creates horizontal innovation whereby game providers compete simply based on the game. While this opening up of the platform is driving competition for themes, there is also a parallel innovation whereby new games are being created with adornments or mechanical innovations.

In our “Gaming Floors of the Future” series, which appeared in the July 2010 through June 2011 issues of CEM, we touched on some of these innovations and the challenges that will arise in leveraging these new technologies for both slot manufacturers and casino operators alike. A casino floor that has deployed downloadable games technology onto every single one of its slot machines has replaced an old problem—which games should we lease/buy?—with a new, much more complicated problem—which settings should we put on every single one of those games during any given time of the week? As for the slot manufacturers, they now have to consider how they will deal with increased competition from smaller manufacturers as the ability to download games to a cabinet leads to lower and lower barriers to entry for new competitors. We have shown in past articles that the level of complexity of both of these problems goes from the thousands to the billions, trillions and beyond. It is our opinion that the real horizontal innovation isn’t necessarily going to be only in the gaming product, but rather will include innovation in the analytics needed to properly optimize this new, far more complicated world.

Pricing Innovation
When looking at the insides of many gaming devices today, to quote a casino executive who preferred to remain anonymous, the components are “little more than a powerful computer with two screens.” We extracted a price for a high-end gaming computer from the Dell website; the price, including two screens, is approximately $2,000. The price of a gaming machine, we have heard, is $25,000 or higher on the street. This leaves a $23,000 difference to allow for the construction of the cabinet and all other peripherals.

Quite simply, in this world of reduced revenues, many operators will never be able to justify a $25,000 investment, especially when games, in our experience, often have less than one year in which they outperform the house average.

Pricing innovation is seen in a number of areas, including the different participation models, prices of conversion kits, and the cost of a downloadable games library. This innovation is the start of a journey that is needed in gaming prices, and it’s a journey that we hope will result in fresh gaming floors where gaming operators are able to compete for the entertainment and recreation budgets. Understanding that the competition is coming from many angles, from home entertainment to enhanced lottery offerings, is key.

External Systems
One example of external systems is a messaging system, such as SkyWire Media. According to Shawn Harris, CEO of SkyWire Media, this system enables “carefully tailored messages with specific call-to-actions to a targeted customer base that has opted-in to receive a message.”

Furthermore, Harris states that “the ability to apply the Skywire technology across the entire operations wherever a customer interacts with a POS truly drives horizontal value with our customers.” This horizontal innovation is, strictly speaking, outside of the gaming system, but is designed to be integrated with the gaming experience.

Simply put, the innovation in the gaming hardware lies at the core of the gaming offering, and while innovation is often driven by periods of dramatic change, there is little doubt that the gaming product will evolve at a breakneck speed. The question is how to make it affordable to all operators and how it can be integrated with the other forms of innovation to enhance the horizontal experience.

Architectural Innovation
The gaming industry has clearly been driven by architectural innovation—just look at the impact that themed properties have had on Las Vegas, where, according to Barry Thalden, “people still flock to the volcano at The Mirage, The Venetian’s canals, the Bellagio’s fountains and gardens, the New York New York’s skyline, and the miniature Eiffel Tower at Paris Las Vegas. And they still come because gambling is fun.”1

This architectural innovation was, for the best part of a decade, the cornerstone of innovation in the Las Vegas market. Today, however, it is in contrast with the recent building trends that have focused their innovation in other ways, as, according to Thalden, “the newer properties in Las Vegas … have become much more sophisticated and contemporary.”

In many ways, architectural innovation is like the big picture. It sets the stage for the entire gaming experience—just consider the impact of the Eiffel Tower and the commitment to the distinctly French theme at Paris. This architectural innovation is, in our opinion, the cornerstone of the offering that the property has.

Architectural innovation has been applied in quite a different way in Indian gaming. In these properties, the innovation is often focused on the gaming floor, with large, themed designs being applied to the inside of the property. According to Thalden, “Architecture at many native casinos is also interesting and fun.” The implication is that the focus of the innovation on the core business of the industry, namely the gambling product, has been successful in these environments.

Clearly, architectural innovation has been at the cornerstone of innovation in gaming in the last 10 to 20 years. While we cannot predict the future, we can say that this horizontal innovation has in the past, and is likely to again, define the gaming experience.

Horizontal Innovation Drives Revenue
As we have shown in the first three articles of this series, the gaming industry abounds with horizontal innovations that have successfully driven brought home money in the past. The examples are often industry changing in their impacts; examples range from the impacts of the player tracking systems to the innovation in architecture at the Mirage in Las Vegas. As we look forward, we think the industry needs to find new horizontal innovations that can drive fun, excitement and profit in the next 10 years. As with any innovation, it is hard to predict where it will come from, but it is likely to be a bold move by a creative group that provides this critical source of growth.

1 Casino Enterprise Management, January 2011, Barry Thalden, “Of Truths and Consequences: How Las Vegas Forgot How To Make Money.”

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