With expansion of the casino resort industry moving into new jurisdictions like Ohio, Massachusetts and elsewhere, it’s easy to forget that some of the largest volumes of new gaming seats over the next few years won’t be in casinos at all, but in bars, taverns and restaurants.
There has been a revolution of sorts over the past few years in video lottery terminals, or VLTs—not only in the U.S., but around the world. And the trend only promises to continue.
But what is a VLT? The definition changes according to who is asked the question. Some states like Maryland and West Virginia call the slot machines in their casinos and racinos VLTs because the state lottery owns the machines or manages the central system that links the games for accounting purposes.
Other states in the U.S.—namely, New York and Washington—and some European nations such as Austria run central determinant systems, and in those cases, the machines are perhaps the most true form of a “video lottery,” in that a central system deals results to each machine in the jurisdiction from a finite, replenished electronic “stack” of results—an electronic version of a stack of instant lottery tickets.
However, the form of VLT that is growing most rapidly across the world is the style of machine for which the term “video lottery terminal” was invented in South Dakota in 1986, a machine distributed in limited numbers to each of a large number of locations along one or more routes within a jurisdiction. Stakes are limited, top payouts are limited, and in most cases, players who win are paid by a clerk who pulls the cash out of a lock-box.
“Ninety-nine percent of the world does not understand the definition nor the history of a VLT,” comments John Connelly, vice president of business development for slot-maker Bally Technologies, a company with irons in the fires of just about every kind of VLT. “On this topic, we tend to mix apples, oranges, bananas and Volkswagens into the same conversation.”
Connelly notes that there are overlaps of technology between each type of VLT, depending on the market. “A lot of people say New York is a VLT market, which it is, but in actuality, New York is very different than Illinois, Oregon and other markets, because of the technology behind it,” he says. “And the types of companies you see in each market are very different, specifically because of the technology you see behind the regulations.”
Central Determinant Lotteries
The VLT markets in the states of Washington and New York are the only U.S. jurisdictions in which VLTs in casinos are any different than the Class III slot machines in Las Vegas or other mature markets. In Washington, the central-determinant machines are in Indian casinos, and carry certain characteristics similar to traditional VLTs—the betting limit is $20, for instance. In New York, games must return at least 90 percent of wagers, and the heavily taxed machines, because they must operate as a finite-result video lottery, must have extra elements in the technology to allow them to stay within those rules. Video poker, for instance, will award “bonus” payments if players do not follow simple strategies for obvious wins.
But the markets make up for those restrictions in volume—particularly New York, where Genting recently opened the state’s largest VLT venue at Aqueduct—and New York City’s first casino, Resorts World New York.
Because of the system requirements, the suppliers serving the New York market are limited, and the main slot suppliers are ones with experience with system-based gaming in Class II markets as well as traditional Class III casinos. Texas-based Multimedia Games supplies the central determinant systems for both Washington and New York, and supplies many of the games there. Bally supplies a large volume of games to the central determinant states as well. Both companies have experience rooted in the Class II markets—Multimedia made its name in Class II, and Bally inherited one of the top Class II game and system suppliers in 2005 when it acquired Sierra Design Group.
Vendors in states like New York, where the video lottery racinos compete with Indian casinos offering traditional Class III games, take on the additional role of helping casinos market their floors and maximize revenues. “We visit our customers on a quarterly basis,” says Joaquin Aviles, vice president of technology for Multimedia Games, “to understand their limitations and to listen to their system and gaming needs. We monitor their floor performance to create new ways to entertain their patrons, as well as provide unique and automated ways to enhance their marketing campaigns.”
As successful as these casino-based VLT programs are, the hottest emerging markets for VLTs are in the form of traditional route-based machines. And the new jurisdictions on everyone’s front burner these days when talking about VLT expansion are Illinois in the U.S., and in Europe, Italy—and soon, Greece. Meanwhile, lotteries in Canada just completed a ritual they perform every seven years or so: a massive replacement of machines and updating of system technology for VLTs in the provinces, the total number of which rival the number of slot machines found in Canada’s casinos.
Illinois Gears Up
It was 2009 when Illinois Governor Pat Quinn signed the Video Gaming Act into law, authorizing bars, taverns and restaurants with liquor licenses to have up to five licensed VLTs at each location. As is a common theme with new VLT jurisdictions, the impetus behind the law was for the state to benefit from gambling that already existed illegally—it was estimated that more than 30,000 gray-area video slots and poker machines had been operating in downstate Illinois alone, and gaming machines had been fixtures in Illinois bars since the 1980s.
The 2009 law, part of a $31 billion omnibus highway construction measure, called for eliminating all illegal gaming devices and replacing them with what, at the high end, was predicted to be a legal machine base of 40,000-50,000 machines across the state. Initial estimates had the state earning anywhere from $375 million to $500 million annually from the games.
Those estimates would be adjusted significantly over the ensuing three years, thanks to a combination of hundreds of municipalities opting out of the new program and a challenge to the new law in the courts. A group of well-connected owners of a large liquor distributorship challenged the law on constitutional grounds, alleging the state constitution did not permit the bundling of a gambling bill with an unrelated highway construction measure.
After back-and-forth decisions by lower courts, the Illinois Supreme Court upheld the law in a late 2011 decision. After the court decision, the Illinois Gaming Board kicked into gear with a methodical program to implement the law. Part of that law required the old gray-area machines to be cleared out.
The law required that all “amusement only” machines that comprised the gray market cease operation by June 1, 2010, when their license stickers expired. The law made operation of illegal gambling devices a felony, meaning operators caught operating gray-area machines, instead of a fine and a slap on the wrist, could now be put out of business.
The new law had teeth. “From a legislative standpoint, by giving the state a vested interest in the performance of gaming, we can justify putting the pedal down on criminal gaming,” says Bill Service, president and CEO of Illinois Gaming Systems, one of the major route operators in the state. “There are much more significant consequences now if you’re caught with (illegal) games.”
Replacing the illegal games were VLTs from nine approved manufacturers. Stakes were set at $2 maximum bets and $500 maximum wins. VLT revenues are taxed at 30 percent by the state. Operators receive 35 percent of adjusted gross receipts, and licensed establishments receive 35 percent.
By the time the first VLTs went live in Illinois last October, much of the anti-gaming sentiment that had caused municipalities to opt out of the program had disappeared. According to a spokesman for the Illinois Gaming Board, as of the beginning of May, 222 of the more than 500 municipalities that had elected to opt out of the program had opted back in. At press time, 6,175 VLTs were up and running at 1,503 locations, with more cropping up every day.
While some manufacturers set up their own distribution, more go through 70 licensed in-state operators such as Illinois Gaming Systems, which established routes among the 21,000 liquor-licensed bars and restaurant owners in 900 municipalities throughout the state.
IGS is run by veterans of the VLT trade. Service began his distributed gaming business 20 years ago in Oregon, and his company has run VLTs at bars and restaurants in that state and in West Virginia, which added VLTs in bars and taverns to its lottery-owned racino operations through 2001 legislation.
Service says that while the creation of VLT networks is similar in all three states where his company operates, Illinois has some significant differences from the VLT industries in Oregon and West Virginia. For instance, Illinois requires a network of licensed operators to actually buy, maintain and operate the games. West Virginia gives establishment owners the option of purchasing and operating their own equipment. In Oregon, the machines are bought and owned by the state lottery.
Another difference is in how winners are paid. Unlike any state in the U.S. “and perhaps all of North America,” says Service, Illinois requires that every VLT location have a secure automated payment system for every ticket—a payout kiosk similar to those in casinos.
“I’m a huge fan of this rule,” Service says. “I believe it’s a great and important feature in safeguarding the proper care of this industry. The alternative, of course—the way they do it in Oregon, West Virginia, Montana, South Dakota, Louisiana, any place where there is distributed gaming—is to have some version of a locked drawer and cash register, with a clerk giving out hundreds to thousands of dollars of winnings right out of the till. This is a much better system, albeit more expensive.”
The terminal operator is responsible to pay for the payout kiosk, as well as buying the machines from major manufacturers and maintaining all the equipment. Service says the total equipment cost for a five-VLT operation is $100,000, not counting the cash that must be kept in the kiosk for payouts.
“The establishment operator has almost nothing to do as far as operation of the games,” he says, “and if there are any disputes with respect to the players’ tickets or winnings, that’s my responsibility as well. We ultimately have the legal responsibility to make sure every player is correctly paid.”
Service says IGS specializes in placing terminals in restaurant locations. “We can add a lot of value to a restaurant owner who is putting five games in,” he says. “We really know the market for retail gaming; we know what works and how to market those games to make it into a profitable location.”
Revised estimates put the potential market in Illinois at around 30,000 machines, which means that more than half of the market has yet to be established. (If Cook County/Chicago, which opted out, were to opt back in, that number would soar to 45,000.)
According to Service, the market share currently is dominated by International Game Technology, Bally and Spielo International, but there is plenty of room for other manufacturers to get a slice of the action.
For instance, two smaller manufacturers formerly known mainly in Class II markets have each seized a very healthy 10 percent of the new Illinois market. American Gaming Systems—whose CEO, former Bally chief Bob Miodunski, ran Nevada’s largest slot route for years—has contracted north of 2,000 units in Illinois.
AGS had Illinois in its sights when the legislation initially passed in 2009; it was one reason Miodunski was brought in as CEO. “Having Bob at the helm has been instrumental for us, and critical as we’ve gone after this market,” says AGS Marketing Director Andrew Burke. “Very few people in the industry have as much route experience as Bob does.”
AGS took a methodical approach in pursuing the Illinois market. It bought rights to the “Cherry Master” brand of amusement games, the dominant brand among the old bar machines, and used its new Roadrunner platform to create modern legal games with features already familiar to Illinois players. Once the library of games was wrapped into a multi-game unit for Illinois, AGS worked with a select number of major operators to connect with establishment owners.
Another smaller Class II operator approaching 10 percent market share in Illinois is Tennessee-based Video Gaming Technologies. VGT, which has more than 19,000 games in Class II markets like Oklahoma, has made connections with all the Illinois route operators, according to Illinois Sales Director Frank Fortunato. He says the company modified its three-game unit to create a 10-game unit for Illinois.
“In 2010, we started contacting all route operators applying for gaming licenses,” Fortunato says. “We marketed our product to them, and they in turn marketed to the locations. We must have done 70 shows throughout the state in 2010 and 2011, and did more shows in 2012.”
All of the suppliers and operators agree that the crafting of the law in Illinois, and the way the state implemented it, provides a model for how to replace gray machines with a thriving VLT market. “We believe other states are watching Illinois very closely,” says Shanna Sabet, a spokeswoman for IGT. “So far, the experience has had very few hurdles, and could be a good blueprint for new VLT markets.”
“Illinois has done a fantastic job of taking essentially a gray market where thousands of machines were untaxed, with no benefit to the state,” says Connelly from Bally, “and turning it into a regulated market generating significant benefits to the state and the taxpayers.”
Adds Burke from AGS, “This model of a smaller number of machines in a lot of locations makes sense for a lot of states trying to close budget gaps, and also trying to fight gray gaming.”
Hockey and VLTs
It’s a model that has worked for years in Canada, where VLTs are nearly as common a leisure activity as the hockey games on the TVs in the bars and restaurants where the provincial lotteries have placed more than 35,000 units in all.
The provincial lotteries have established their own model for distributed VLT gaming, with distinct rules that set them apart from Canada’s destination casinos. “It’s a very established market,” comments Victor Duarte, senior vice president of gaming and content for Spielo International, one of the slot manufacturers dominant in the Canadian VLT market. “Some of the provinces are on their third generation of technology, and they really see the value of the central system and what it can do.”
VLTs in Canada operate in the same manner as traditional Class III slots, but they are linked to central servers that provide monitoring, accounting functions and downloading of game content. Spielo is the only system supplier supplying the Canadian VLT market. “The provinces are very aggressive in assuring they have industry-standard protocols,” Duarte says. “They have the widest implementation of G2S today that I’m aware of. They are utilizing downloading to enable games to be remotely served to the machines, and to be switched. They definitely have the leading edge of one of the great things happening in gaming today.”
The Canadian lotteries only recently wrapped up what is a seven-year ritual of updating system technology and instituting a massive replacement of VLT units. According to Duarte, while the timing of the replacement cycle is not set in stone—”It’s really dependent on when the government and lottery decides to procure new systems and games,” he says—every seven or eight years, suppliers like Spielo sell tens of thousands of units to the five Canadian lotteries.
“It’s something we take very seriously,” Duarte says of the replacement cycle. “When the replacement wave comes along, as a manufacturer, you really have to appreciate that these lotteries are making long-term investment decisions. You have to be prepared to stand by them for seven or eight years.”
“It’s like an orchid; it only blooms every seven years!” says David Finn, executive director and general manager of the Canadian market for IGT, which, like Spielo, is dominant in Canada.
Finn says that in addition to different wagering rules for VLTs that distinguish them from casino slots—lower wager and maximum bets are common—the nature of the game content itself is different in the VLTs than traditional slots. “The volatility, the math is geared to a very different type of player,” he says. “I always said a player goes into a casino with $200 to $500 and wants to win $5,000, but a VLT player goes into a bar with $40 to $60 and wants to win $500.
“If you look at how the demographics are segmented in the VLT space, there are a lot of folks who are interested in time on device, which had been a bit of a shift in the casino world as well, but the volatility of the (VLTs) is a lot flatter than in the casino environment.”
The other difference to be seen in a mature Canadian VLT market is a model for dealing with problem gambling. All of the provinces have implemented responsible gaming measures over the years, often working them into the requirements for gaming manufacturers. “It varies from province to province, but in some provinces you can set time on device,” Finn explains. “Some provinces let you set the maximum you want to wager. Nova Scotia lets you set limits—I don’t want to play at particular times; I only want to play this much total.”
While IGT and Spielo maintained their dominant positions in the recent Canadian replacement cycle, other manufacturers like Aristocrat and Bally made significant strides in market share.
The Italian Model
North American markets are only one story in the saga of the VLT worldwide. Europe has been a hotbed of VLT growth lately, mainly concentrated in Italy, which launched its VLT market in 2009.
Italy had opened its machine market to street AWPs in 2004. “Those were a little like first-generation VLTs in the U.S., in that they were networked with primitive networking technology that would collect handle and hold and calculate tax-due information,” explains Luke Alvarez, CEO of U.K.-based Inspired Gaming, one of the top three suppliers of VLTs in Italy. “Then, in 2009, Italy introduced VLTs, and when they started to operate them in 2010, there were about 300,000 of the AWPs in Italy. There are now about 45,000 VLTs operating in Italy, of which Inspired operates around 8,000.”
Inspired Gaming is Europe’s largest operator of electronic gaming, with 20,000 terminals in the U.K. that are de facto VLTs. “They’re not labeled as such, but they are very similar to the Italian market machines,” says Alvarez.
The other two big suppliers in Italy are Spielo and the Austrian Gaming Industries subsidiary of the Novomatic Group.
Spielo was the first supplier to be licensed in the Italian VLT market, and the first to go live. The firm’s VLT solution for Italy includes games, cabinets, site controller and central system. Spielo has more than 10,000 terminals in the market.
Novomatic has the leading position in the Italian VLT sector with a 44 percent market share and a total contracted 24,000 VLTs as of 2012. The Novo Line VLT was designed exclusively for the Italian market.
VLTs in Italy carry a €500 maximum prize (around US$650), and a maximum stake of €10. “Fully server-based operation is mandated by law,” says Alvarez, “so games cannot exist on the terminal at the time of installation. Games must be downloaded from the central server, not from an in-venue server.” He says gaming files must bear a digital signature so the Italian regulatory authorities can assure that each VLT location is only operating approved software and approved games.
“It is a very sophisticated system, more sophisticated than anything that’s been deployed in the U.S.,” Alvarez says. “Italy represents the high-water mark of government real-time technical control. They want to achieve a high level of player protection, and assure that only approved games are operating. They also are able to assure full tax collection. At the stroke of a button, they can analyze income and tax due from an entire estate, a particular venue or an individual machine.”
The regulatory regime in Italy is itself more complex than many other VLT markets, with a hierarchy of individual venue owners, chain owners with hundreds of venues, hybrid betting shops with low-stake AWPs and VLTs, and mini-casinos with as many as 150 VLTs. The VLTs are supplied under 10 concessions awarded by the Italian lottery.
One aspect of Italy’s model that Alvarez says makes it more challenging than others is the tax regime. It is based on handle—total wagers—rather than machine win after players are paid. “Game designers have to go through contortions to deliver exciting game experiences to players while delivering increasingly lower RGPs (percentages),” he says. “We started out at 92 percent, and had to lower them to the low 80s. We don’t see that being repeated in most other countries. Most regulators apply a tax on the gross win or drop.”
“Italy was challenging because of the sophistication of the requirements surrounding technology,” comments Spielo’s Duarte. “Italy is a market where, from my experience, there is an unprecedented level of control over the gaming markets.”
Greece and Beyond
The Italy model has led other cash-strapped European countries to look into the potential of VLTs to ease some of their economic burdens. Chief among these has been Greece, which created the legal framework for VLTs with a 2011 law. Under Law 4002/2011, Greece will host 35,000 VLTs, to be licensed to OPAP, the Greek gaming monopoly which recently completed a privatization.
OPAP will install and operate 16,500 of the terminals, and will grant operation of the remaining 18,500 to concessionaires. The law provides for four to 10 concessionaires.
The privatization of OPAP, completed last month when private equity fund Emma Delta Ltd. acquired the Greek government’s 33 percent stake in the operator, has delayed the implementation of the 2011 law, but now that it’s complete, the Greek VLT market is expected to ramp up quickly. (The government retains a 1 percent stake in OPAP.)
One of the major investors in new OPAP stakeholder Emma Delta is the Copelouzos Group. According to Katerina Tzannetaki, business development manager for Copelouzos, the new regulatory framework will be finalized within the next two months.
“The Hellenic Gaming Commission had to be established first before proceeding to the development of a VLT market,” Tzannetaki explains. “The Law 4002 that regulates the Greek gaming market was adopted in August 2011, and the Hellenic Gaming Commission was established last year. The Regulation for the Operation and Control of VLTs is expected to be issued in July.”
Those regulations call for a central server-based market that is a cross between what is found in Italy and Canada.
Under the law, OPAP must install its 16,500 VLTs within 18 months after the Operation and Control regulations are in place. Concessionaires have 24 months from granting of the concession to install the remaining VLTs.
The Greek state will tax gross profits on the machines on a sliding scale of 30 percent to 35 percent.
As with Italy, Illinois and other emerging VLT markets, the law establishing the market also addresses the illegal gaming market, which has been seen as an impediment to the establishment of the new market.
“The prevalence of the illegal gaming operators undoubtedly could be considered as one of the barriers to a successful VLT market in Greece, especially since the illegal locations operate without any of the restrictions that will apply to the legal gaming halls and their players,” says Tzannetaki. “However, there are a number of criminal sanctions foreseen by the law that if enforced, we believe, could lead to a significant decrease of the illegal market.
“The effective enforcement of the law is considered necessary and crucial for the elimination of illegal gaming operators and the direction of the players to legal gaming networks. The above combined with the adoption on behalf of OPAP of a strategy regarding a potential cooperation with the illegal operators—i.e., turning the illegal operators and locations to legal ones—could raise the possibilities of developing a successful VLT market.”
The new market in Greece is viewed by suppliers as the next big opportunity. “Notwithstanding the well-publicized state of the Greek economy, it is still a decent-sized country that has minimal legal gaming at the moment,” says Inspired’s Alvarez. “It has a lottery business that does well, and a number of small and medium-sized casinos that do amazingly well. There is a lot of untapped demand for gaming. It is likely those machines will do very well.”
As for the next VLT frontier after Greece, suppliers talk of several possibilities. “You’re going to see Southeast Asia grow,” predicts IGT’s Finn. “You’re going to see South America grow, and you’re even going to see some states in the U.S. grow.”
“Europe in general is trending more toward a VLT type of product,” adds Bally’s Connelly, “and we anticipate significant growth in that region. At this point, trends indicate that Europe and Latin America offer opportunity, but I am a firm believer that other jurisdictions will be popping up.
“I’ve been doing this long enough to know you never limit your options.”