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Road to Riches

Route operators deliver games to customers, profits to owners, and taxes to governments

Road to Riches

Gaming flaunts a complex, secondary revenue stream.

Say hello to slot-route operators, who bring gambling to restaurants, bars and taverns. They won’t garner the headlines of companies with monolithic, glitzy casinos buildings. Yet, their presence feeds state governments, local economies, small business and companies that supply game content.

This intimate environment—no more than 15 devices are allowed inside any Nevada property, and the number is far lower elsewhere—produces a unique gaming hybrid. Four-of-a-kind has met happy hour, bonus games accentuate dinner. Low-limit games flourish as a sideshow, where customers congregate.

This business is, in the realm of gaming action, a mere “taste.” But it’s an important one.

The battle for this slice of the pie features several angles. Nevada is the industry kingpin, offering a regulatory climate second to none. It takes a small fee per property instead of taxation and it lets operators and game suppliers divide profits. Nevada thus encourages investment and lets the market determine the industry.

This model fits well in a state with abundance of wide-open space and a natural setting for small, “outpost” gaming.

Other states see the industry differently. Oregon parlays its lottery into half a billion dollars of annual revenue, primarily from video slots. The state garners more than three quarters of the profit, but allows entrepreneurs to function with a small up-front investment.

Louisiana’s government takes different amounts from bars and truck stops and uses the state police to run its affairs.

Illinois scuffles in local politics, and has finally begun accelerating its licensing process four years after voters legalized it. The state claims 30 percent of the win, enabling perhaps just enough for operators and companies to split.

Those who provide products in these states plan accordingly. Some tweak their lineup and are in no rush for a major rollout. Others keep new devices coming without regard to politics.

However they proceed, companies enjoy this game. They know that the tavern owners have a manageable operation cost and a high chance for success via walk-up, as in someone just throwing two bucks in the machine.

There are many ways to prosper, one coin at a time.

Nevada Sets The Tone

Nevada’s business-friendly climate has spurred companies to be aggressive with new products. Even while the number of statewide locations dropped slightly—from 2,163 to 2,002—since 2008, this only mirrored the larger gambling industry ravaged from the recession. And for someone trying to catch the beginning of a rebound, why not start small?

United Coin Machine Co. and Golden Gaming account for more than half of the state’s 2,000 locations, while several additional operators find creative ways to function.

Las Vegas-based United Coin has invested in the hope of increased demand. It launched five new products last August and an updated version earlier this year. United services more than 400 statewide locations, according to Brad Fredella, its manager of gaming analytics. One of its most recent rollouts, Interactive Gamblers Bonus Advantage or iGBA, made an instant impact, he says.

“The demand for iGBA went through the roof,” Fredella says. “Over 100 of our locations signed up to take the technology before we even released it. We are installing one now at the rate of every seven to nine days.”

This is an upgrade of the Gamblers Bonus Advantage reward program featuring an interactive component that allows players to participate in bonus games (like spinning a point prize wheel or running a pig race) rather than just getting a static point award.

The iGBA system supports a virtual drawing system, allowing local bar and tavern operators to offer promotions previously only available at larger casinos. An integrated player tracking system called Game Tender provides real-time player activity data to location staff members at the touch of a button.

From a player’s standpoint, this is a combination of action and bonus activity, draped around a beer, a ballgame or a meal.

“What makes my eyes pop out is watching the reaction of the players at the bar when somebody triggers an event,” Fredella says. “In our race game, for example, you can have the Pig Race or the Wiener Dog Race. By whatever means you have gained to earn this game (a certain hand or an amount of play, etc.), a player can qualify to have one of five pigs or dogs in this race. Their pig or dog is highlighted during the race and when people in the restaurants see this, they stop eating to see what’s going on in the screen. And the way they start rooting shows how well this has been received.”

Fredella says the big deal here is linking an award to what happens in keno or slots.

“We are, to the best of my knowledge, the only system able to automatically trigger an event based on a keno or slot outcome,” he maintains. “All other such systems in the local Nevada market use hand recognition technology, which has been around for a while but only works on video poker games, not slots or keno.”

The edge for a small property over a big casino is that one system is linked to 15 machines, he says.

Any hit that triggers the racing event draws immediate attention and a reward. A player does not have to wait for a slot host or any other casino employee to recognize the accomplishment, find him on the gaming floor and set up an award.

How do partnerships work? In most of them, United provides the machines, the iGBA and Game Tender systems, collects money and maintains the machines, usually for a 30-70 share of the split. In a smaller number of deals, it leases player tracking and bonusing systems for a weekly fee to the bar owner who owns the machines.

Nevada’s other big route operator is Las Vegas-based Golden Gaming, which underscored its faith in this market last year. The company’s purchase of Affinity Gaming LLC’s slot machine route makes it the largest slot machine route operator in Nevada. The deal gives this company 8,500 slot machines at 650 locations.

Golden Gaming operates three divisions.

Golden Route Operations (GRO) is a market leader in player tracking, rewards, player recognition and communication technology. It is a licensed local route operator for gaming devices in bars, taverns, truck stops, convenience stores and grocery chains. Last May, it announced the first-ever player rewards program specifically geared toward the grocery-store gamer. That program is in more than 110 locations statewide.

Last September, GRO announced a significant commitment to slot manufacturer IGT. GRO places its own tracking technology onto the machines.

Another division—PT’s Entertainment Group (PTEG)—is the state’s largest tavern operator with 41 establishments. Each tavern features the innovate Sports Bet Live Account wagering kiosk. Every Nevada location also has a rewards program for instant cash and logo merchandise.

Golden Casino Group completes the lineup. Its realm includes Pahrump Hotel & Casino, Gold Town Casino and Lakeside RV Park.

In shoring up one of its major arms—GRO—Golden Gaming adds to its self-perpetuating prosperity. With GRO and PTEG, it occupies both ends of the slot-route operator and business-owner relationship. By having its own casino, it also owns a place to put any new games.

Illinois Picking Up Steam

Illinois took a deliberate route into this market, but looks geared to gather momentum in the near future.

“You have 1,620 video locations and 6,673 video gaming terminals out there now, but that number should be vastly higher in the next three to five years,” says Don Pesceone, senior vice president of sales for Incredible Technologies, based in Vernon Hills, Illinois.

“The rollout has been far slower than anybody anticipated, but that’s because the gaming board is doing a thorough job with its due diligence. It is challenging for operators to go through that whole licensing process. But you are seeing about 150 licenses being approved each month now.”

Illinois cannot move quickly enough to satisfy bean counters. It had the nation’s worst deficit of $43.8 billion in 2012 and gaming revenue is one of the few areas which can provide funding. While it tries to fast-track licensees, it also considers legislation to put casinos in racetracks and dramatically increase the size of the gambling industry.

So while the state tries to ferret out “bad actors” in the licensing process, it hustles to rake in new good money.

Pesceone believes the state had little choice but to move slowly at first. While legalization of slots in bars and restaurants gained state approval in 2009, its implementation required subsequent approval in each municipality. Then the tedious licensing process ensued. So did logistics like keeping operations away from schools and churches, a significant matter.

Pescone says Illinois did not want to repeat what happened in Iowa, when operators put devices in gas stations, convenience stores and dry cleaners, prompting the governor to pull the operation. Minors had too much access to gambling.

Illinois faced another hurdle: legalizing something that had recently functioned underground. Operators were slow to come forward for licensing scrutiny. They were replaced by newer business owners, but that process took time.

What encourages operators now is the fact the state wants them in business. It collects 30 percent of the win, while the location and the company installing the equipment split the remaining 70 percent.

Incredible Technologies supplies an array of games (30 in poker, for example) to the companies who deal with the restaurant and tavern owners. The devices must be specific: Illinois demands an 88 percent-90 percent payback percentage and the top payout of a single pull is $500, Pesceone says. Each location is allowed up to five machines.

Even that relatively small amount, however, prompts significant up-front costs for a route operator. Five VGTs with devices to get the ticket and dispense cash, plus the money needed to put in the machines can run $130,000-$140,000, Pesceone says. It will take someone well into the second year to recoup the initial outlay.

For some, that’s no problem. For others, it’s a deal breaker. That’s why another avenue has unfolded. Aristocrat is one of the big companies that have dangled a proposition to those facing stiff up-front costs: The company offers a leasing plan for a few dollars a day, allowing business owners to get into the game quickly.

While market conditions unfold around them, Incredible Technologies braces for an anticipated market surge.

“We used the slow rollout period to tweak our software and get ready for a full-blown launch when that makes sense,” Pesceone says. “We came into the casino market with no visions of grandeur. At the end of the day, you need to provide a game that is good and makes the customer money.”

Oregon: Always Hitting The Lottery

Oregon had an early jump in the slot route game: It made lottery terminals in restaurants and taverns part of the state lottery in 1992.

The move, coupled with an important addition, pays huge dividends. Of the $549 million generated in 2012, $482 million came from the video terminals, according to Chuck Baumann, a spokesman for the Oregon Lottery. The lottery has poured more than $8 billion into state coffers since its 1985 inception. That in turn has funded public education, economic development and job creation throughout the state.

VLTs are a major part of the revenue picture.

“From 1992 until 2005, poker was the only game available on the machines,” Baumann says. “In 2005 we added slots, and that became a huge factor in our revenue. Retailers had been clamoring for that, and once we got the green light, we enjoyed some big years. Once we got the video slots, we had what people really wanted to play.”

The Oregon model contains nearly 2,300 retailers, who have liquor licenses, another 1,600 in places like convenience stores, and more than 12,000 terminals. Each location is allowed up to six machines once the operator has cleared a background check with the state police.

Operators are spared the burden of up-front risk. The lottery owns, provides and services the machines. It also collects 76 percent of revenues and has a liberal ceiling for players. The maximum win on any game event is $10,000.

In this case, the risk-reward end of the equation rests with the state. Operators meet specific space requirements and are given flexibility in some important areas. They can, for instance, offer machines in a bowling center, where kids would reside, if the devices are in a separate room which minors cannot access.

Baumann says that although business has flattened, the video lottery terminals continue producing well. The state refreshes at least one machine every quarter with new game content.

Louisiana: The Truck Stops Here

A 1996 referendum brought several aspects of this type of gaming to 31 parishes in Louisiana. Business is conducted by state police and broken up into video poker at bars, lounges, hotels, racetracks and truck stops. All told, the state took in more than $180 million in the fiscal year ended last June. This total is down slightly over recent years.

Bars, lounges and restaurants are taxed at 26 percent, racetracks at 22.5 percent and truck stops pay 32.5 percent. The state operates more than 14,000 devices at more than 2,000 locations. Truck stops provide the interesting wild card in this state. The stops produce the lion’s share of revenue, attracting a large drive-through market. Some establishments have refurbished through the years in order to become more service-oriented.

Each state grapples with its unique logistics for modern slot marvels. If governments can’t bottle and sell it, they will at least tax and regulate it. Entrepreneurs will make small or large investments depending upon the environment they operate in.

Maximum leverage could mean capitalizing on a market monopoly to some. It may also entail being patient with a minimal investment to others.

Casino Connection Sports Editor Dave Bontempo is an award-winning sports writer and broadcaster who calls boxing matches all over the world. He has covered the Philadelphia Flyers in the playoffs, as well as numerous PGA, LPGA and Seniors Golf Tour events, and co-hosted the Casino Connection television program with Publisher Roger Gros.

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