This month’s article is based on a question we received from a gentleman who recently relocated to Las Vegas from Rio de Janeiro. He stated that he is looking to get into the gaming industry and was educating himself by absorbing as much as he could from gaming journals. He asked a compelling question that got us thinking: In the coming years, who will squeeze more value out of the gaming industry—the manufacturers, game designers or the casinos?
In our opinion, it’s the manufacturers. Not because they have a more compelling business plan or offer a singular value over the others, but because they are in the most advantageous position. Be it reducing the number of titles available, offering the most compelling content as revenue-share pieces or limiting development released to the market, big manufacturers hold the most control and therefore are in a position to get the most value.
The large industry manufacturers currently dominate the market in the following ways.
Rules and Regulation
The major manufacturers created or discovered many of the innovations that have allowed our industry to prosper. Throughout the years, they clearly understood the opportunity to influence regulators by educating them on the technologies they produced. Prior to the advent of the independent gaming laboratories, gaming commissions leaned heavily on manufacturers to gain the knowledge necessary to regulate the quickly expanding gaming industry.
While the commissions were heavily focused on limiting the influence of organized crime, major manufacturers used their influence to push through regulatory content that was favorable to them and limited the market to a select group of providers. Today, it is extremely difficult for a business that came up in another industry to break into the game-manufacturing segment of our industry. Learning to navigate the outdated, and in some cases archaic, existing regulations is time-consuming and expensive. In addition, manufacturers must be licensed in and comply with multiple jurisdictions, which is costly and requires large staffing levels.
Many of the successful titles we see on slot floors today are math model clones of other successful games. New game concepts are extremely expensive to design, build and market for general release. The failure rate of released titles is incredibly high; it’s not abnormal to see fewer than 10 of 100 released titles considered a qualified success based on coin-in and utilization.
If a game doesn’t have “legs,” it won’t last on a casino floor. By legs, we mean that the casino’s cost for a replacement title is somewhere between $3,500 and $5,000, depending on the manufacturer. If the average game in your facility won $120 per day, you would need to increase the revenue on the game you intend to change out between 8 percent and11.5 percent just to break even. Since we are not in the business of breaking even, a game must exceed the house average for an extended period of time or the purchase is considered a failure.
Let us clarify what we mean by increasing revenue on the game. We cannot create new revenue by stealing it from another machine on the floor. It must be new money to the facility or incremental in nature. Because of this, operators are more likely to want a clone of a game that has performed well for them in the past. Game clones generally offer a variation to subject content, changes to bonus games and sometimes an appealing name attached to it.
If you had the opportunity to replicate the math model of a successful game in your library, replace the artwork with a new and fresh theme, and sell it across the country for huge profits, wouldn’t you do it? Highly educated people with proven track records, both from within and outside the gaming industry, operate the major gaming manufacturing companies. They clearly understand the opportunities game emulation offers. It doesn’t make any sense to spend the majority of your operating budget on research and development when you can capitalize on your existing game libraries and spend the money on new markets or reoccurring revenue streams.
The most compelling new game content released each year is offered to the casinos only through revenue share agreements with the manufacturers. As an example, let us say a major manufacturer created a new game around the TV show “Duck Dynasty.” This game would have an immediate pool of players based on the success of the show and the Robertson family’s superior marketing skills. The gaming company convinces the Robertsons, signs a licensing agreement with the family and offers this game to a casino as revenue-share in order to pass on the cost of the licensing agreement.
The casino operator would sign a deal for this game in the hopes that of bringing new players into the casino that would otherwise not have visited the establishment. This decision would be made with the full realization that the loyal customer base will be attracted to it and leave their standard fare to play this new title. As the operator watches the game’s performance over the next month, he would realize that he has created almost zero new revenue and instead has handed over a significant amount of already captured win to the manufacturer of the new “Duck Dynasty” game.
Giving up at least 20 percent of the win to the manufacturer for the luxury of having an alluring game on the floor is difficult to stomach, but it is an everyday practice. Very few games offer enough “bang for their buck” to get a person to change their spending habits enough to substantially increase incremental win. To add insult to injury, even though the game is popular enough to steal your regulars but not compelling enough to draw new play, you realize the manufacturer will receive a steady revenue stream as long as the title remains viable within the market.
Although the casino may appear to have the final decision regarding game purchase and placement on its floor, the reality is closer to the idiom of “keeping up with the Jones.” Casino purchases are often based on the choices of their competition. Basing major game purchases on neighboring competition is not a reality that gaming establishments are proud to admit, but it is common.
The truth is, as an industry we are not creating thousands of new players each time a new casino opens; we are luring them away from the competition. In order to exceed players’ expectations, an operator must first meet the amenities of the competition and then exceed it. If your neighboring competition has the new “Duck Dynasty” game, you may feel the need to either match that offering or find something more compelling to the customer base. Either way, any short-term solution you settle on will almost certainly have an operating agreement attached to it.
The Game Designers
If game designers or content providers outside the major manufacturers want to make an impact on the gaming industry, they may be waiting for some time. The current trend in popular game style will continue until the baby boomers and the early Gen-Xers have lost the economic edge in discretionary income. To those who are in their late 40s and beyond, mastering new concepts in their entertainment venues is not an appealing proposition.
These folks want to relax and have at least a passing understanding of the games they are spending their hard-earned entertainment dollars to play. To give you an idea of what I’m saying here, attempt to explain the payouts on a 100-line game to a 70-year-old female just once and you will understand it very clearly. Game content must remain easily understandable and appealing to the players providing the largest portion of wallet to the casinos.
To attract the late Gen-Xers and Millennials to play, game designers have their work cut out for them. This demographic has, for the most part, grown up “plugged in” to cell phones, email, text and social media. The stepper games of today and majority of the video content appear as antiquated to them as a bi-plane does to a baby boomer. Millennials are not looking for the traditional gaming experience that our current player base desires.
If game designers do their homework and design to the needs of the next generation, they will have the industry by the tail. They have the time now to research and learn while waiting for the younger gamers to gain the disposable income that casinos seek. Because the major manufacturers are more concerned with the present, the future looks promising for content providers that are willing to offer their titles, using software as a service. If casino operators feel the provider is a true partner, rather than operating within the current revenue-sharing model that often takes more than it provides, they will go to great lengths to help the new providers succeed.