Why Do We Still Have Slot Machines?

Why Do We Still Have Slot Machines?

“The manufacturing industry is rapidly changing. The traditional model of selling boxes to operators is obsolete.”

–         Jim Murren, CEO, MGM Resorts International

No matter how long you’ve worked in the gambling industry, or how many times you’ve walked into a casino, there are still occasions when the casino floor seems almost awe-inspiring. There are so many lights, and so many sounds, and so much movement. And with new massive multi-player slot installations and increasing emphasis on sound, screen size and resolution, there’s even more for customers to see and experience.

Why Do We Still Have Slot Machines?But when you think about the business side of the casino floor, there’s one key question: why on Earth, in the year 2014, do we still have all these individual machines? To be sure, there are new slots – International Game Technology’s Avatar comes to mind – that offer truly impressive audio and video. But the overwhelming majority of slot machines appear to feature graphics and processing speeds roughly equal – if not inferior – to the $400 laptop on which I write this article.

But that’s not what those machines cost. In fiscal year 2013, IGT’s average game sold for over $13,000; the average selling price was over $16,000 at rival Bally Technologies. Multimedia Games, which has traditionally focused on tribal customers, received over $18,000 on average for its machines. These costs are, of course, just the up-front costs required; they don’t account for participation or leasing costs going forward. And yes, those figures include sales of multi-player units and high-end branded installations, which skew average figures upward. But, at the same time, consider what a consumer could do with $6,000 – less than half of IGT’s average selling price. An ultra HD TV would cost maybe $3-4,000, leaving plenty of money for a monster sound system and the most comfortable chair on the market. That package would compete with – if not best – the most remarkable hardware any slot manufacturer currently offers in terms of audio, video, and comfort. And it costs less than half as much – at retail.

There’s another aspect of individual hardware that makes its continued use somewhat illogical: the loss of control. An IGT video poker machine in Atlantic City can only play IGT video poker games. There are likely options for the format – Jacks or Better, Double Double Bonus, and the like – and a few options for the denomination used. But that $10,000 machine can only play a few variations of essentially the same game. A $600 iPad in Atlantic City can play literally hundreds of different games. This difference harms land-based casinos in two ways. First, it offers less flexibility to a player. A player who is sick of video poker and instead, would like to try a slot machine, must physically move to do so. The same process can take two or three taps of a screen on a tablet in the hotel room above the casino floor – or a living room 100 miles away. Secondly, it offers less flexibility to the casino. Casinos must make major allocation decisions about valuable space well in advance; those choices are fixed, costly to reverse, and impossible to change in a reasonable amount of time. It’s largely wasteful; and it a business with the leverage of the casino industry, where incremental revenue turns almost directly into profit, it’s costly. It takes no more than a few minutes in a casino on a busy night to see a player waiting for one slot machine (or electronic table) while two chairs sit empty right next to them. (Or even worse, the waiting player occupies one of those empty seats, making both the customer and the machine unprofitable.)

All told, the casino floor has seen surprisingly little change since the introduction of cashless wagering, which began over two decades ago. There has been a modest introduction of electronic table games, and incremental improvements in the customer experience with slots (ranging from audio and video extras to bonus rounds to the ability to order drinks and manage loyalty programs through the devices). But the casino floor of 2014 looks an awful lot like the casino floor of 1994; the massive technological change of that period, ranging from widespread Internet adoption to mobile usage to ‘cloud’ systems, remains astonishingly underrepresented on the casino floor.

To be sure, Bally has long focused on systems; IGT has created multi-jurisdictional jackpots with newer technologies; and Multimedia Games’ TournEvent system is a step forward in many ways. But, like the ability to order drinks, or oversized screens, these are modest changes to the business model, rather than a fundamental transformation of the business model of the casino floor.

That transformation hinges on one key question: why have individual hardware at all? Why not have linked screens run from a centralized location – which, in the modern world could even be off-site. Indeed, Caesars could run its over 50 floors from a centralized location, using real-time data and analytics to target customers that were already in its properties. Does your loyalty card show that you prefer Deal Or No Deal? Well, Caesars could send a text that shows there’s a seat open, and if you sit down now, we’ll guarantee you get to hit the bonus round in the first ten minutes or give you a $10 comp. Is the population in a casino skewing oddly in one direction – either older or younger? The floor could use historic preferences to alter the very games available at that moment. The customers in a casino are vastly different at 3 pm on Tuesday relative to 9 pm on a Saturday; why must the games be the same?

All told, current technology would appear to give operators a level of capability substantially higher than currently available. Cloud technology could link massive numbers of machines together, allowing players who moved machines within a casino – or to other properties – to save preferences, recover bonus histories, or receive micro-targeted incentives to return. If, for instance, a player from Cincinnati spends 3 hours on Avatar in Las Vegas, he or she could be allowed to receive a special bonus game at a local location within the following two weeks. Achievement levels could be maintained or upgraded based directly on play on specific content, as opposed to specific properties. National rankings could be recorded (think of the scoreboard on the Golden Tee machine at your local bar), giving patrons a bit more incentive and providing free advertising when the machines were out of use, as the screens rolled through the biggest winners of the day, week, or month.

Meanwhile, a movement from focusing on hardware to software would allow for dramatically greater flexibility. Slot machines could be switched by casino management instantly; if there’s a line for Michael Jackson: King of Pop and an empty seat at the Hangover slot next to it, a floor manager could simply switch the game over for a customer. Or improved interfacing could allow the customer to do it on his or her own. Underperforming games could be quickly and easily removed from the casino floor. New content could be far more easily rolled out and tested. This flexibility is essential going forward, for one key reason: right now, a casino in Atlantic City has far less control over the gambling options its casino offers than do the many websites catering to online gamblers in that state. That gives a large advantage in marketing and customer capture to online sites.

Finally, some sort of Internet adoption could have vast impact. The potential uses are seemingly endless. Mobile devices could be integrated into the customer experience to better utilize loyalty programs or even be used as virtual wallets. Sports books could create integrated terminals offering single-play wagering or vastly expanded proposition betting using online resources. Gambling could expand to the buffet or restaurants (beyond the ubiquitous Keno screens seen in Las Vegas and elsewhere); why not take your existing video poker credits and transfer them to your iPad while you grab a snack or sip a beer?

The possibilities above are just a sample of what casino operators could potentially offer if they insisted that the technology on the casino floor catch up with what’s available in every other industry on the planet. So why don’t they?

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There are reasons, of course. Casino executives aren’t idiots. The standard challenges that make the casino industry such a difficult, albeit fascinating, business are the same challenges that make massive sea changes unpalatable at best. Among them:

Demographics. It’s widely known – one need only walk across a casino floor pretty much anywhere in the world – that the core demographic for slot machines is players age 50 and up. And, at the risk of being stereotypical, older people are generally less thrilled by change than their younger counterparts. The inability of slot companies to market to younger customers has been a topic of discussion for years – Bally CEO Ramesh Srinivisan  discussed it directly at last year’s G2E – and one can easily understand casino executives’ reluctance to change the look and feel of a casino floor overnight, if at all. It’s daunting to change the interface of slots, or integrate new technologies, when the core customer base is – again, at the risk of being stereotypical – far less likely to understand and enjoy the enhancements.

That said, this issue is somewhat surmountable. No matter what technological changes come, casinos cannot overhaul their floor instantly, simply based on capital expenditure budgets, supplier agreements, and the like. But there’s no reason that a portion of a casino’s floor can’t be used to focus on updated, modern technology that might appeal to the very slot customers casinos claim they can’t get. And as we move forward, the older population will be more and more familiar and comfortable with the technology casinos could be rolling out.

Supplier agreements. IGT, Bally, and other slot machine manufacturers are hardly going to recommend to their operators that they switch from a bank of 20 individually purchased slot machines to a networked collection of individual screens, while foregoing the five-figure revenue upfront from each machine. In addition, the relative oligopoly on the supplier side – there are essentially six or seven key manufacturers, at most, and IGT and Bally combined control roughly half the market – a casino that demands the end of hardware or even substantial modifications risks losing the content its customers want. This requires a delicate dance for casino owners; these type of substantial changes would probably require massive changes in contract terms for content suppliers, who would insist on a greater share of long-term profits to make up for lower upfront revenues. Again, this is a problem; but not an unconquerable one.

Regulation. The bane of every casino’s existence. In the near-term, it’s likely that the types of changes met above would be met with some resistance from regulators, particularly in less progressive or less experienced jurisdictions. But in the long run, these changes would massively benefit regulators as well. Checking payout odds on a single server located in a data center in Utah is far easier than monitoring 1,200 individually programmed slot machines on a casino floor in Mississippi. It wouldn’t seem difficult for most regulators to grasp that concept.

Marketing. Existing slot machines have massive fixed marketing space, such as the rotating signs that are the staple of every “hey, we’re at the casino!” shot on movies and television. Assuming the end of hardware – or the ability to change games at the user level – there would need to be changes on the marquees, etc. But, again, it’s not a difficult problem to overcome, given current technology. The marquee could be linked to the game and content providers could focus on branding their company (a development that will likely occur online) as well as opposed to simply their games. Rather than promoting Avatar individually, IGT could promote its entire content base, promising customers a range of exciting games with fun bonus rounds and individualized content on whatever machine they sat on.

Standardization. It’s unlikely that IGT, Bally, WMS Industries (now a part of Scientific Games) and other suppliers will come to terms on a standard – and less expensive – hardware platform that could, in theory, operate games across suppliers. Similarly, the minor differences in hardware interfaces between the companies – button placements and the like – could be an issue. But, at the same time, a third-party vendor could arrive that would supply a simple hardware base that would be compatible with a range of software and the servers on which that software would run, while casinos purchased and/or maintained LCD/LED screens to show actual gameplay. Again, this is a difficult problem, but one with myriad solutions.

All told, there are very real reasons for the glacial pace of change in the casino industry. But, at the same time, it’s not hard to imagine just what a casino floor could – and should – look like in the future. As Murren’s quote at the top of this article shows, casino operators are already looking forward to the floor of the future. The only question is how to get there.

Jay Harris. If you wish to submit your own editorial please contact Bill Beatty.