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Supply Side

Are the Big Three now the Big Five or the Big 10?

Supply Side

The proliferation of supplier companies in North America has gotten increasing attention, with investors wondering whether the oligarchy of the former Big Three is gone forever and, if so, who the successful newcomers will be.

It’s easy to see why. Not only has the Big Three of IGT, Bally and WMS become the Big Five with Aristocrat and Konami, but so many other companies have announced grand ambitions.

Aruze, with the power of billionaire Kazuo Okada behind it, wants to be one of the biggest players.

Historic Class II players such as Multimedia Games and Cadillac Jack have big Class III ambitions.

Incredible Gaming, watching the world of arcade games perhaps receding into history, is entering the slot machine business.

Leonard Ainsworth wants to do with his eponymous Australian-traded company what he did with Aristocrat, which he founded.

AC Coin & Slot ended its relationship with IGT so it can compete toe-to-toe.

Lottery giant Lottomatica gives heft to its slot subsidiaries Spielo and Atronic.

And numerous European-based suppliers, including the Novomatic giant, talk about entering America, though that is still mostly talk.

Encouraging them is the rise of competitors to IGT, which once had nearly 70 percent of the market, leaving the others to spend redundantly in a fight for what was left.

The two most striking examples have been WMS and Konami. The former reached 30 percent ship-share in the fourth quarter, according to respondents to the Roth-Fantini Quarterly Slot Survey, about the same as IGT. And Konami, a tiny presence just a couple years ago, has reached double-digit ship-share in recent quarters.

But there is still a long road to travel for small companies. The oligarchy may be bigger today, but it is still intact.

Consider, the Roth-Fantini survey showed that the Big Five comprise 93 percent of American slot machine orders. Of the remainder, 5 percent was Multimedia Games and AC Coin.

In other words, all of the other slot machine companies—Aruze, Ainsworth, Incredible and the others—were fighting over 2 percent.

And the logic of the argument still stands: How many companies can afford the R&D, licensing, sales, distribution and maintenance costs of supporting a continent-wide business?

That is not to discount the possibility of an upstart making it big. Aruze has its powerful and committed CEO, and Ainsworth has fast-growing American business platforms as it gets licenses in new jurisdictions. AC Coin has been growing fast. And Incredible is just getting started.

Multimedia Games also happens to be cheap, with a recent enterprise value-to-EBITDA ratio of just 3.5 times vs. around nine for IGT and Bally and eight for WMS.

But if we had to guess, we’d say the likely outcome is that some of the upstarts will give up, and some of the bigger companies will see the wisdom of merging because, as said before, the logic of economies of scale is powerful.

Meanwhile, even if they don’t displace members of the oligarchy, they can make life more difficult for them.

Wells Fargo gaming analyst Carlos Santarelli recently reduced earnings estimates on IGT and WMS citing what he called pressure from smaller and lower-cost competitors, which could be aimed at Konami, which has gained share at least partly on price.

Table Games

The table game side also has seen a proliferation of competitors.

Until recently, the market was pretty small, with some private game developers having more or less success and achieving some scale in several cases. Otherwise, for public investors, Shuffle Master was the only game.

And that is still true for felt tables.

But electronic tables are rapidly emerging and, though often dismissed by industry veterans, there is no reason to believe that e-tables and hybrid live-electronic tables will not come to predominate casino floors.

Shuffle Master itself offers clear testimony. Electronic table games and systems now combine to bring in more revenue than proprietary table games, and nearly match the card shuffler business that gives the company its name.

Thus, it is no surprise that competitors are moving in. The first to take a crack at it was Interblock, the European company allied with Aristocrat.

It stumbled in North America but could come back, and other European companies could enter.

For now, Shuffle Master dominates.

For example, Shuffle Master e-table revenue exceeded $15 million in its first fiscal quarter. The three publicly traded competitors in the space combined for just $14 million for all of last year. Their totals do not include privately owned DigiDeal.

They are:

• PokerTek, which began with automated poker tables and is now expanding to other games.

 • Galaxy Gaming, which like Shuffle Master, has gravitated from proprietary table games into e-tables and electronic side bets.

• DEQ Systems, which is moving from side bets and bonusing to e-tables.

Today they are all penny stocks, but so rapidly a growing space, there may be room for more than one big company, as the slot-makers have shown.

 

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