Making do with less is not exactly a formula calculated to excite Wall Street, but it is the reality confronting the US casino industry, plagued as it’s been post-recession by a soft consumer economy and an aging and dwindling patron base.
In the face of which, market-watchers have believed for a while that consolidation in America’s machine gaming sector—the largest in the world, comprised of some 900,000 devices, a US$45 billion industry—is both desirable and inevitable.
They’re getting their wish.
Mergers and acquisitions are reshaping the landscape, some $16 billion worth over the last 18 months, and lottery giants GTECH and Scientific Games now bestride that landscape as owners, respectively, of IGT, and Bally Technologies, WMS Industries and SHFL Entertainment—all publicly traded companies prior to being swept up.
Aristocrat Technologies, the US division of New South Wales-based Aristocrat Leisure, has been in the hunt as well, scooping up Video Gaming Technologies, a leading supplier of games to the US tribal and Mexican markets. Leaders in the critical peripheral technologies governing jackpot and bonusing systems, digital signage, cash handling, ticketing and printing are also feeling the impacts: MEI is now part of the company that owns CashCode and Money Controls; JCM recently purchased FutureLogic; Aristocrat is buying Paltronics.
“Duplicative costs, including research and development, have helped prime the industry for consolidation, and we believe merger and acquisition activity in the sector underscores demand for slot suppliers’ content in a slow-growth environment.”
Then there is the Internet, which continues to redefine the complex of relationships between player and game, particularly in the mobile arena. Lotteries and slots are not the disparate worlds they used to be.
“In addition to cost synergies, we believe a marriage of slots and lottery will enable Scientific Games and GTECH to leverage Bally’s and IGT’s slot content, respectively, across their lottery business,” Fitch wrote. “This is especially important because of the proliferation of online gaming, in which lottery operators have an opportunity to participate.”
“A key theme among gaming equipment companies will likely be recognition of the need to be bigger and to be international in order to compete,” Union Gaming Research (UGR) said in its July analysis of the $6.4 billion GTECH-IGT deal.
The social gaming sector is forecast this year to generate well more than $2 billion in revenues worldwide, and there are projections it could hit $17 billion over the next several years. Certainly IGT and Bally have been aggressive in pushing into it. IGT’s purchase of Double Down has been one of the few bright spots in more than two years of quarterly earnings reports. A decade ago, the company controlled 60% of the North American slots market. It was down to 41% last year, according to US-based Eilers Research.
But then the casino industry outside of Las Vegas has hardly lit it up in the aftermath of the recession, and sluggish growth in machine games—the industry’s bread and butter, particularly in the regional markets, where they generate about 85% of revenues—is largely to blame.
“This customer segment comes for popular nightclubs, but are not slot players,” the firm says.
“We have seen flat-to-down trends in slot win across both the Las Vegas Strip and throughout the U.S. With a younger mix of players coming into casinos, a key concern for the equipment industry is that slots generally appeal to an older, more risk-averse gaming customer.”
“Specifically, the Millennial Generation grew up with video game technologies that provide high-quality graphics and an interactive experience,” as St. Louis-based consultants Rubin Brown note in a recent statistical survey of the industry. “Transitioning these patrons to slot machine players has proven difficult.”
As one Midwest operator mused at May’s Southern Gaming Summit: “I just don’t have a sense that what we’re doing on the floor is connecting with what is happening in the outside world.”
Couple this with a downsized and uncertain economic future—the new reality for majority of the consumer class—and the numbers pretty much say it all:
US commercial and tribal casinos generated a record $66.3 billion in gaming revenue last year, but it represented growth of only 1.6% over 2012, which should have furnished a much kinder comparison given that it was essentially flat against 2011, and six states opened new casinos or expanded their existing offerings during 2013. While of the states that saw no significant expansion, only Nevada—which is to say, the Las Vegas Strip—and New York saw year-on-year revenue growth; and in 11 of those states revenues declined.
Rubin Brown’s compilation shows a decline of $85.5 million in machine gaming revenue in 2013, about minus-0.3%, which would be minimal if not for the fact that seven new casinos opened last year and 10 reported their first full calendar year of results.
Which isn’t to say things haven’t improved since the worst of the recession in 2008-2009; but commercial and tribal revenues have grown since at a combined average of only 1.46% a year; yet, five new states have added casinos over this time, five have added racetrack slots, and some 26 new tribal venues have come on line, 67 new facilities in all. At least a dozen more are in the pipeline in the Northeast alone.
“More markets are becoming saturated and new competitors are increasingly cannibalizing their neighbors rather than growing the pie,” as investment analyst and publisher Frank Fantini has noted.
“Overall, the US gaming industry will continue to grow through the emergence of new markets, such as Massachusetts and New York,” says Rubin Brown. “However, this growth will be offset by continued declines in existing markets.”
Golden Nugget owner Tilman Fertitta summed it up at the Southern Gaming Summit: “We continue to open casinos, yet we’re not growing revenue.”
The expanded R&D to be achieved by turning very big slot companies into bigger companies should go a long way toward addressing the product side of the problem, But as strategies go, the buying of technology and market share is nothing new for the sector. And still demographics and economics are outracing it. Rubin Brown is optimistic. The industry, they say, “is quickly working to develop a more interactive gaming experience that includes group-play bonus rounds, connectivity with social media, and payout tables that vary by a person’s ‘skill’.
Others are less sure. “In recent years, skill-based games have received a lot of buzz, however, the technology has yet to gain widespread popularity in the field,” says Union Gaming. “In addition, gaming regulators seem generally averse to the proposition of adding a skill element to a slot machine. The companies we met with did not have any near-term plans to focus on skill-based games, and there is no clear answer on how to solve the conundrum of appealing to a younger customer as the older generation passes.”
Eilers expects North America’s installed base of slots to increase only about 1.2% over the next eight years, down from approximately 5% in the mid-2000s.
UGR’s advice? Look for the M&A to continue.