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Supply-Side Complications

It’s no longer as simple as how many slot machines you sell, it’s how much economic diversity you have

Supply-Side Complications

The gaming supplier business was pretty simple not long ago. Companies sold or leased slot machines, and some provided casino management systems. That was pretty much it.

That meant similar business models: Sell games, in which case average sales price was an important metric. Lease them, preferably on a revenue-share basis, in which case average daily win per machine was an important measure.

Those businesses were easy to understand and to compare.

Not so much today.

Now, in addition to slot machines in casinos, we have online gaming, real money and casual. We have social gaming. There’s sports betting and sports betting platforms. In addition to Class III and Class II slot machines, we have skilled-based games and historical horse racing.                    

There are mobile gaming and their platforms, interactive sports betting and their platforms. Companies boast of their omni channels. We have electronic table games, stand alone and stadium. For social and casual gaming, whole new metrics have been invented, such as average active users per month, average daily revenue per user, app store revenues. Even the language has changed, as makers of social games are referred to as publishers. A couple of the larger companies have lotteries that themselves are both brick-and-mortar and online.

The result is a divergence of business models. Here are some examples:

  • Scientific Games gets about half its revenues from traditional slot machine and systems businesses. Lottery combines for nearly a third, and interactive for more than 20 percent—recently about 8 percent from its direct interactive business, and 13 percent from majority-owned SciPlay social casino.
  • IGT gets more than 40 percent of its revenues from lottery, and the rest from gaming. But gaming covers a wide variety of businesses beyond slot machines, such as interactive and sports betting.

IGT recently moved to simplify management of its disparate and sprawling enterprises by creating two umbrellas under the corporate umbrella—global gaming and global lottery.

  • Everi revenue is split about evenly between slot machines and games and its fintech services.
  • Aristocrat has had a booming conventional slots and systems business, but its digital businesses also are booming, and now comprise 40 percent-plus of revenues. That includes its Plarium subsidiary, which provides social games with no relationship to gambling.

So, while these four companies get half or more of their revenues from gaming, they also have significant differences. For IGT and Sci Games, the difference is their lottery businesses. For Everi, it’s fintech. For Aristocrat, social gaming.

But each of these separate businesses gives these companies two important qualities—ballast and diversification. As we’ve seen with the Covid-19 pandemic, slots shut down when casinos shut down, but people continue to buy lottery tickets. Or, in the case of Aristocrat, they play social games online. And in normal times, fintech gives Everi steady revenues independent of what’s happening in its games half.

A risk and drag on IGT and Sci Games are the debt they’ve accumulated. They’re aware of that and intend to improve their balance sheets, which they need to do because we won’t live in such a low-interest rate environment forever, and a strong balance sheet is a competitive advantage, as Aristocrat demonstrates.

Another way to look at gaming technology companies is to look at the industry. Conventional gaming in the U.S. is not the growth industry that it was. There are what might be called infill opportunities for new casinos and new jurisdictions, but the bulk of what we will have we already have. Likewise, there are potentially big international opportunities, such as if Brazil goes big into casinos, and as casinos in other countries upgrade to an American level of properties.

But there also is a downside risk—casinos deploying fewer slot machines. That’s been a trend for a long time, but it might be accelerated by Covid-19 as casinos move to cut costs permanently. A special Eilers-Fantini Slot Survey related to Covid found that 70 percent of casinos that had removed slot machines during their closures do not intend to fully replenish their casino floors. Some casino company CEOs on their second-quarter conference calls flat-out said they’ll consider reducing the number of slot machines they offer.

On the positive side, there’s the proliferation of online gaming and sports betting in the U.S. The arrival of cashless gaming also should provide a boost for the companies with those products, which include Everi, IGT, Sci Games and Konami among gaming suppliers.

Those positives, however, may be at least partially offset by stricter regulations internationally in countries acting, wisely or counterproductively, to address what their policymakers see as problem gambling.

And there are always the stories of individual companies to consider, such as AGS still having many new markets to grow into, or Ainsworth having a deep-pocketed parent in Novomatic.    

The old saying is that the more things change, the more they remain the same. Thus it is for gaming suppliers. No matter how complex their businesses become, and no matter how much the world changes around them, they ultimately are in the entertainment business. In brief, there will always be a prosperous future for well-run companies that make great games.

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