In the corporate history of International Game Technology, there has arisen, at crucial points, savvy executives who have moved the company forward. Starting from the beginning in 1975, when it was founded as Sircoma Company by gaming pioneer William S. (Si) Redd, himself a castoff from another slot manufacturer, IGT has produced leaders that have been innovative, creative and non-traditional.
Redd’s hiring of Chuck Mathewson as chairman in 1986 was another turning point for the company. Under Mathewson’s leadership, the R&D dollars that IGT typically invests paid off handsomely with the debut of Megabucks, the first linked progressive slot system. IGT soon had the lion’s share of the casino market and other slot manufacturers were reduced to also-rans. Mathewson gathered a powerful team of executives that continued to encourage the innovation and sales that the powerful organization needed to drive its growth.
But the technology explosion in the early 2000s transformed those also-rans into fierce competitors, and IGT began to see market share slip away. Changes in the boardroom and executive suites throughout the industry allowed those competitors to continue to gain ground.
A decision to bring in board member Patti Hart, a former executive with Pinnacle Systems, Inc., [email protected], Sprint and other companies, as CEO may be sparking the kind of reinvigoration IGT already has experienced multiple times. Hart has built a team made up mainly of managers and executives with vast technology and management knowledge but little gaming experience. As she moves to transform IGT into a technology company, the new executives are also maintaining their focus on IGT’s current customers.
Some say it was IGT’s single-minded devotion to server-based gaming that caused the initial erosion in market share, but IGT Chief Operating Officer Eric Tom says that’s not the case now. He says IGT has a more balanced view, with games still being front-and-center as the most important aspect of the company.
“We spend well over $200 million a year in R&D,” says Tom, who came to IGT in July 2009 with an extensive background in technology companies like Qwest, Force10 Networks, Sprint and others. “That is almost double our nearest competitor. One of the things that we’ve really had a lot of energy and focus around is how we make that $200 million actually feel like a lot more. So while $200 million has been a constant number for IGT over the past several years, we’re getting a lot more out of that, because of some of the things we are doing.”
Tom says the company is building fewer games but spending more time and money on each game it rolls out. He says some of that R&D money is spent on market research.
“We think about game characteristics that resonate with players,” he says. “We perform market segmentation to understand different types of players, and the types of game characteristics, when combined together, that resonate with that type of player. We are very disciplined about building games by segment, most importantly in the volumes necessary to serve that segment, so that we don’t get too focused on one piece of the market. IGT prides itself in the ability to serve a very broad marketplace, so to us, these are not niches. These are important segments of the market we serve.”
So by using this research in combination with the design studios that have recently been refined, Tom says games are the key.
“Our business is making great games,” he says. “We may think about how to distribute the games through different mediums, but it always starts with the creativity that exists within the company. The development process that we’ve built at IGT over the last couple of years, whether it’s market research, market segmentation or other initiatives, are for the single purpose of putting our studios in the best position to create those games. We give them the guidelines, but it still requires just a little bit of pixie dust, that little bit of magic, that comes out of our studios to differentiate ourselves in the marketplace. And so, yes, games are absolutely the most important asset we have, and we won’t forget it. We continually remind ourselves of that.”
The new IGT president, Eric Berg, says IGT is certainly a technology company, but it is also much more.
“First and foremost we are a gaming company that serves the operators to better care for their customers,” says Berg, who was formerly CEO of SunGard Availability Services, along with experience at NCR and Frito Lay. “We are definitely a technology company, but the technology is an enabler, the delivery platform we use to serve our customers. If you want to be the preeminent supplier to the gaming operators, you have to be the best at using the technology that delivers those products. Technology changes include software and hardware integration. Mobility and internet connectivity are coming. In order to understand how to serve the operators, we have to understand the consumers. What do they desire in their entertainment? So we’re also a consumer company, as well.”
Tom says IGT is also concentrating on the implementation of the company’s server-based gaming system, sbX.
“Our focus this year has been on adoption,” he says. “It’s very important that we are able to showcase how server-based gaming improves the productivity of the floor. It’s technology, but unless the technology translates to more productivity, it doesn’t really mean much. So what’s exciting about the stage we’re in right now is, we have about 50 customers on sbX, and that’s enough of a critical mass where we’re getting results from that customer base that give us strong indications that they’re experiencing the productivity we had hoped for.
“We had some customers in the first quarter experience 10 times growth—and I’m not saying 10 percent; I mean 10 times growth—in the productivity of the pieces of the floor that were connected to server-based gaming and our libraries. Now, we’d hoped that would be the case a year from now, but frankly, that’s the kind of uplift you get when you initially leverage the sbX product that we’ve got in market today.”
One area where IGT is leading the market is the development of “apps” to be used on the sbX system.
“Our customers are continuously commenting that they’re looking for more out of the application arena,” says Tom. “And so we have actually a dedicated part of our studios that just builds applications for our server-based customers. We have several out already and a number of them launching this upcoming quarter and then throughout next year.”
IGT has eyed online gaming for several years. The company bought WagerWorks, a groundbreaking online game provider, in 2005 and has had a dedicated Interactive division since 2010. An agreement to purchase Swedish online gaming provider Entraction was completed in June. Tom says the purchases make sense for the current market, despite some observations that IGT was counting on the approval of online poker legalization in the U.S. to monetize those buys.
“We’ve really been tempered in our investment in online gaming,” says Tom. “We clearly believe it is an opportunity for the future, and so we want to participate in that opportunity. But we recognize that the opportunity today is in parts of Europe and potentially other parts of international markets, whether it be Mexico or Canada. And so we’ve had our investment commensurate to the opportunities in those markets.”
Tom admits that the U.S. would be a great market, but says the company’s investment today is not dependent upon legalization there.
“Now, the U.S. market obviously is a big opportunity if and when it does happen, but we all recognize that our industry is dependent upon regulatory changes, because you could find yourself waiting,” he says. “So our view is, we’re investing for those international markets that are available today.”
The purchases of the two online companies make sense in the current environment, says Tom.
“We think Entraction gives us a multi-tenant platform that would allow us to host poker, online gaming, casino-based games, bingo and sports betting,” he says. “Of course, on the online casino game side, with our Interactive division, we’re a market leader in that space. But the addition of poker and some of the other aspects on the Entraction organization really gives us a multi-vertical platform. We’re in the process of building our roadmaps and evolving the technology, integrating it with what we’ve got today, and going to the marketplace where we’re allowed.”
Since IGT is licensed in all known gaming jurisdictions, it has a definite advantage when it comes to hitting the ground running, whereas most online gaming providers will have to endure the time and expense to vet their investors, officers and technology. So in a legal U.S. online poker market, IGT is gold.
“Our plan is to serve our operators,” says Tom. “That’s why the Entraction acquisition was so important. There are a number of platforms that are out there which serve online players directly, but to be able to host a number of casino operators on the same platform was not a capability of those platforms, so Entraction was important because it was multi-tenant. It allows us to go to our various operator customers and enable them with a platform that allows them to participate in the online gaming business, with minimal investment in the technology, and maximize their value to the overall partnership that would come from having the player relationships, managing those player relationships, and marketing to their players.”
Unlike some of IGT’s online competitors, Tom says the company has no plans to compete with its customers in the online gaming space.
“One of the things you just don’t do is compete with your customers,” he says. “More than $2 billion of revenue a year comes from our core customer base. So it would be a silly proposition to try to compete with them. We want to enable our customers, who all want to participate in a larger piece of the gaming pie. But the challenge in participating in online gaming is platform game development; it requires a lot more pieces. And so we hope to deliver those pieces.”
Mobile gaming, in some estimation, holds even more potential than simply online gaming. Tom says the company began to prepare for that with the purchase of U.K.-based Million-2-1, which is now part of IGT Interactive, to provide the online and mobile solutions for IGT.
“We believe online gaming will come in two forms,” he explains. “It will be obviously online. But today online is as much about being mobile as it is about being in front of the computer. And so mobile gaming is, in effect, online gaming. Our vision and direction is to have online gaming in both mediums. And then obviously, the ultimate vision is that online gaming and mobile gaming will eventually converge with traditional casino-based gaming, where a particular customer or a player that a casino has a relationship with will be able to participate in traditional gambling and gaming in a casino, but also maintain that relationship when they are online, or maintain their relationship when they are mobile and gambling in a different medium.
“And so it is very important that we leverage technology to access a market that our casino customers might not be able to otherwise access. The goal is to build a converged platform that allows our customers to participate in all three mediums, and enable their players to participate with them in all three mediums.”
Market Share Creep
Neither Berg nor Tom is concerned that the casino market share for IGT has slipped from the 70 percentile in the early part of this decade to the mid-40s recently. Tom says it would have been virtually impossible for IGT to maintain that level given the growth of the industry and the explosion of gaming technology.
“It’s certainly a natural market reaction if you look at it at a macro-level; our industry has grown in its market presence,” Tom explains. “As a natural result, you have more entrants into the marketplace serving our customers. And so naturally, over time, people get better at what they’re doing, and so it’s very clear to us that this will be a competitive industry going forward, and will not revert back to the good old days, where we didn’t have such intense competition.
“But our aspirations are high. We realize that it’s going to be competitive, and we’re OK with that. We’re not necessarily, as an industry, competing against our traditional competitors. Sure, we think about them, but this is probably more about competitors on the horizon that have alternative entertainment to gambling—to just playing slot machines and engaging in the services and the experience that a casino can provide. We believe more competition and more resources that are put into making great games in our industry really improve the overall industry’s ability to compete with other forms of entertainment.”
Tom also points out that IGT has gained a huge advantage in other areas, not defined by casino market share.
“People traditionally think about market share in our biggest markets, like Las Vegas or Atlantic City, in your traditional casinos,” he says. “But IGT is also very focused on many other important markets. Take the video lottery market, for example. It is a very important customer base for us; we’ve traditionally done very well in that market. We are very focused on bringing great entertainment not only to the traditional casino, but also to that video lottery customer, whether in Canada, Oregon or Italy or upcoming in Illinois or in Greece. These are opportunities that are substantial, and important for us. There are a lot of different opportunities in the marketplace that we’re focused on.”
IGT is much more than just casino gaming, says Tom, and traditional market share evaluations are becoming less important.
“There’s no real ceiling to our aspirations,” he says. “I think we recognize that there aren’t as many new casinos being built as there were years ago. As a result, our desire is to focus more on the replacement cycle and international expansion. When you think about that, when you think about what are our aspirations, they really don’t put a ceiling on it. If you think about the international markets, they’re growing much faster than North America. And in the international markets, we don’t have the same market share that we have here in North America. So we have a lot of upside, a lot of opportunities.”
Berg says defining IGT as simply providing products and services to the land-based casino industry would be a mistake.
“IGT is a global company with customers on a global scale,” he says. “But I think we have the opportunity to operate the company much more globally to take advantage of the scale and reach we have to be able to serve our customers—existing and to come—more effectively.”
The Great Comeback
IGT is struggling with the economic realities of the casino industry, just as every slot manufacturer is. Tom believes that the good times will return, but is just not sure when.
“We haven’t seen the return yet, but it does feel—if you look at all the indicators—like the players are beginning to come back, across the board,” he says. “They certainly are active in the marketplace internationally. We all hope that the turnaround is just around the corner. But I’ve been saying that for about a year and a half now. The way we’re approaching it is, we assume that it will still be intensely competitive, and there will not be enough to go around. Our goal is to take market share from our competitors, and you do that by having great games.
“For many years we were very focused on how sharp the blade of our sword was, and that the sharpness of our blade was important when you’re opening a new casino, because you wanted to grab that 50-plus-percentage market share. But we’re now more focused on how sharp the tip of sword is, because in the replacement market, it’s OK to have fewer games, but the games you do have, have to be great. And so we’ve found success with that evolving view. When the market comes back, we’ll reinvest. $200 million goes a long way, especially if you’re leveraging it to the full extent. And so when the market comes back, we’ll redirect ourselves.”
But Tom believes that there is a new reality in the market to which all companies will have to adjust.
“We’ve been through some tough times,” he admits. “The business doesn’t naturally grow by adding floor space or adding new casinos, because the market just won’t necessarily absorb it. And so, our customers have had to leverage best practices, like we have at IGT. They’ve had to leverage technology to drive productivity onto their floors. They’ve had to use systems to improve their ability to market to their customers, and to expand how their customers participate with their product. It is not just about the slot machine; it’s about how you create the right entertainment experience with the right systems and technology.”
Berg says the tough times have also brought great opportunities.
“If there is anything I spend time thinking about more than others, it’s the the huge number of opportunities available to this company,” he points out. “The challenge that I have and that Patti and I share is to make sure we’re attacking the most important opportunities first, so we can make tangible progress and significant improvements in the company. What do we do first, second and third, and what do we put off until next year?”
Even though the industry has endured some difficult years, Berg believes there is blue sky up ahead.
“I’m not a Chicken Little,” he laughs. “The industry at its core is still very strong and still very profitable. It serves patrons admirably day in and day out. So it’s our challenge to figure out how we can help the operators accelerate their businesses from this position of strength.”