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Are You Being Served?

Not too long ago, server-based gaming was considered the wave of the future in casino gaming. That wave has yet to break. What happened?

Are You Being Served?

Back in 2007, server-based technology was poised to become the next big thing in gaming. In April of that year, when Nevada regulators OK’d IGT’s server-based system, then-Deutsche Bank analyst Bill Lerner told investors the industry was “on track for widespread server-based gaming implementation” by 2009.

Enthusiasm for the technology was understandable. With server-based gaming, slot machines could be easily and invisibly reconfigured from a centrally based “mother ship.” With the ability to quickly download any game to any machine on the floor, operators could serve more players with fewer machines, minimize dead zones, and maximize revenues.

The systems would be intrinsically more efficient, enabling operators to quickly change denominations depending on the time of day and level of play. Because the works would also be centrally based, operators would need fewer slot technicians to monitor and maintain the inventory.

In theory, it all made great sense. Players could get what they wanted, when they wanted it, each time they walked on the floor. Casinos would save time, labor and space, and theoretically expect to make more money per square foot.

By creating a truly fluid and customizable gaming environment, proponents said, server-based technology would revolutionize the industry.

Timing Is Everything

Five years later, the U.S. gaming industry has yet to buy in to server-based systems, at least on a big scale. What happened?

Part of it was timing. Months after Lerner’s prediction, the economy tanked. By 2009, when server-based systems were supposed to have become the norm, the industry was in survival mode.

Operators didn’t have the inclination or the capital to make the switch. Not to mention, they had made big investments in cashless technology just a few years earlier.

“Casinos were reluctant because they would have to buy a whole round of slot machines, and they had just done that with ticket-in/ticket-out technology,” says Todd Eilers, of Eilers Research, a California-based gaming advisory firm. “Then you ran into the recession in 2009. It was certainly not going to happen—then?no one had any money.”

In fairer economic weather, server-based technology might have been an easier sell, suggests Frank Neborsky, former vice president of slot operations at Mohegan Sun. “You can use a server-based platform to constantly rotate in the newest games, the newest models, the latest technologies offered by the manufacturer, and it may increase the win-per-unit or the handle you’re seeing for that game.”

But in tough times, when every dollar counts, “that incremental value is not something that’s new to the property; it’s just pushing dollars around the floor,” Neborsky adds. “In a business environment that’s flat—where just staying even-keel is the new ‘up’—the cost, the work and the overall value of what server-based technology brings to the industry did not warrant the cost.”

One benefit touted by manufacturers was the ability to easily manage yield; a single machine, for example, could go from a penny slot on Tuesday or Wednesday to a dollar slot on weekends, when demand is usually higher. Using a server-based system, casinos could also adjust hold percentages to offset cash giveaways and other incentives.

The problem could come if players catch on. There might be more risk of this in a locals market, with customers who come in all the time, says Neborsky. “It’s a slippery slope when manufacturers start selling the idea that you can instantaneously manage your denominations for a weekend or hold percentage for a promotion. People always say, ‘I was winning until that attendant or mechanic came up, opened the door and flipped the switch.’”

With server-based capabilities, “casinos can hit that switch any time of the day or night, given certain parameters based on the regulations of their jurisdiction, but it may create a perception of mistrust or uncertainty on the part of the players,” says Neborsky. “The casino has made a yield-management decision to try to either make more money or change the complexion of the floor for a weekend or special event. But that could alienate certain local customers or frequent players that aren’t used to seeing that kind of change happen so quickly.”

Too Much, Too Soon

Another early obstacle to SBG was rivalry among the manufacturers. The big companies—IGT, Bally, Aristocrat, WMS, Konami—didn’t want to work together within a universal system. Because no single system could download and communicate with all the games in a server-based environment, an operator faced the prospect of installing different networks to support the bidirectional communication and transfer of data from the server to the floor.

“You almost needed a company that’s like Switzerland,” says Neborsky, “where they have a server and a network that communicates agnostically to all the games.”

Luke Alvarez, founder and CEO of U.K.-based Inspired Gaming, a leader in server-based games, notes the “slightly oligopolistic” mindset of suppliers in the U.S. who didn’t want to work together. “Everybody wants to be the master system; they don’t want to interoperate so their games end up being just a piece of content on somebody else’s. Because there was no open ecosystem, server-based didn’t actually generate more income either. It was more expensive, it didn’t make more money, and then there was a recession. So it didn’t get traction.”

Yet another hindrance was the mixed vintage of slot machines already on the floor. Older machines, which can occupy up to 50 percent of an established casino floor, couldn’t be retrofitted to a server. Leased games, which occupy about 8 percent of the floor, also were not subject to change.

And then there was the dizzying array of choices. What initially was perceived as a benefit—a library stocked with hundreds or thousands of gaming options—actually had a downside.

“What we recognized was that when patrons go to a casino, they don’t necessarily want to sit in front of a bunch of dummy terminals and be presented with 150 choices,” says Eilers. “It never really made sense. In your destination resort-type markets like Las Vegas, the look and feel of the slot machine, the signage, all of that still very much matter. So that was a big impediment to get downloadable game technology to make sense.”

Alvarez agrees that the technology is less meaningful in mega-resorts with hundreds or thousands of machines.

“The economic case for server-based, which is about multi-game menus and continuous weekly or monthly updates of games, is less compelling and less impactful,” he says. “When a player gets bored with a game, he can move 10 meters to the right and find another machine with a new theme. You don’t necessarily need server-based to deliver novelty and innovation.

“But if there are only five, 10 or 20 machines in a venue, then server-based can powerfully impact the incomes by constantly updating the content over the network.”

For that reason, server-based technology may make less sense in major U.S. jurisdictions. But it is prevalent, even dominant, elsewhere around the globe.

“If you look at the U.K., with a total market of about 150,000 gaming machines, probably a third of those are now fully server-based, downloadable, multi-game machines,” says Alvarez. “If you look at the Italian market, which is probably 350,000 machines, just short of 60,000 of those are now fully served-based.” The Greek market, he adds, has mandated “central determination and full server-based download.”

Over time, that level of saturation could lead to a tipping point for server-based gaming, and knock down the remaining barriers to entry in the United States. “It’s happening emphatically in a number of existing European and emerging gaming markets,” Alvarez says. “I think it will be slower to the Strip and other markets because of the incumbent suppliers and the size of the floors. But I think we will see it gain traction in the U.S.”

Where It’s Working

Though downloadable games have yet to catch fire in the U.S., aspects of server-based technology are “alive and well and operating on the floor right now,” Eilers says. “A perfect example of that is player communication technology. All the major casino systems providers have this sort of technology. Bally has their iVIEW DM. IGT has their Service Window. Aristocrat has an equivalent picture-in-picture technology as well, nComment. That’s one area of server-based gaming that actually has moved forward and is being utilized, and there’s an ROI to be had on the casino operators’ side.”

This technology creates attractions like floor-wide bonus games and sweepstakes tied to player’s clubs. It enables patrons to buy drinks or purchase show tickets through the game screen; it also allows casinos to talk back with promotional offers, card offers, bonuses, and the like.

“So basically, a casino can take over the whole game screen and say, ‘You’ve won a free bonus round or free bonus game,’” says Eilers. “The nice thing about this is, it’s marketing dollars, it’s not actual game play. So the casino can make it look like you’re playing a random game, but the reality is you’re going to win. The casino is going to give you what it would have given you anyway, but in the form of playing a perceived game. There are things like that you couldn’t do three to five years ago.”

At certain levels, players can be entered in floor-wide slot tournaments “with the flip of a switch. Things like this are actually making their way onto the floor because there are actual practical reasons for them, they make sense and it’s useful to casino operators.”

Again, the age of the slot inventory prevents some casinos from installing this technology across the board, “but there is reasonable penetration,” Eilers says. “You should be able to put some kind of player communication technology on at least half of your floor, or in newer casinos, like 60, 70 percent.”

Newer casinos also are employing downloadable games to a greater extent. At Revel in Atlantic City, which opened in 2010, about 40 percent of the slot floor is managed by a central IGT system. It’s proven to be an advantage, says George Mancuso, vice president of slot operations at the resort, who cites “five big things” he likes about server-based gaming: “the ability to react to a player’s request; the ability to be first to market (with new games); variety; performance; and conversion.”

“We have the ability to honor player requests by uploading programs on demand, and it only takes a minute or two,” Mancuso says. “We can be first to market with the newest games, and that gives us a competitive advantage. The third thing is variety. Some of these games that are server-based games can offer one single theme or 100 themes on that box.”

And monthly maintenance fees cost far less than a typical conversion, which can run about $3,000 on average, Mancuso adds.

The performance of Revel’s server-based slots has been impressive, Mancuso says. “We monitor these games, and typically they do perform 30 percent above house average. It improves our performance and efficiencies and leads, in our opinion, to a competitive advantage.”

What’s Next?

Back in 2007, when Lerner said server-based gaming would be widespread within two years, he added a caveat, expressing “general concerns… with respect to the timing of server-based gaming.” Whether Lerner was foreseeing the imminent recession, referring to the recent implementation of TITO, or noting other roadblocks, his disclaimer ultimately proved true.

Today, Eilers says the technology “has been more evolutionary than revolutionary. … It’s not going to be an earth-shattering change.”

“Are you ever going to have an event like ticket-in/ticket-out, where every operator has to replace every slot machine over a two-to-three-year period to implement this technology? That’s not going to happen. Will you continue to see things like player communication technology gain traction on the floor? Yes, I think so.”

With successive generations of server-based technology, start-up costs have decreased, and the technology itself has improved.

“It’s a bit like the mobile phone industry,” says Alvarez. “A lot of emerging markets, because they had really poor first-generation land-based infrastructure, missed the first generation of mobile altogether.” They later “leapfrogged” to more streamlined versions of the technology, jumping ahead of advanced economies.

“If you go to China, the 3G and 4G coverage is better than the U.S. and Europe these days because it’s brand-new. If you look around emerging or new gaming markets, a lot of them are moving straight to these new technologies.”

In time, Alvarez says, the U.S. will catch up too.

“When big international operators see server-based hitting the floor in Macau and Europe and South America, they’re going to say, ‘If I can have it here, why can’t I have it in the U.S.?’”

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