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Introduction
Part 1
Part 3
Andrew Zarnett
Research Analyst
Deutsche Bank
The casino industry has suffered through its worst recession, as consumers spent less on gaming and, more generally, on discretionary goods and services. Given the lack of real growth in the economy, corporate brass resorted to acquisitions to provide diversification to their core offerings and drive economies of scale. 2014 was perhaps a watershed year for M&A, especially on the supplier side, as Scientific Gaming rolled up Shuffle Master, Bally Technologies and WMS into one new company while GTECH bought IGT. Smaller acquisitions also took place, such as the purchase of Multimedia Games by GCA and Aristocrat Leisure buying VGT. Finally, on the i-gaming side Amaya bought PokerStars, a company approximately 8 times its size, measured in EBITDA. As the outlook continues to be challenging we expect many operators will try to pursue valuation growth via the formation of REIT structures, similar to what Penn National accomplished in 2013 with the formation of GLPI. While several operators, such as Boyd, Caesars Entertainment and Pinnacle have announced their plans to spin off their real estate assets, we don’t expect all of them to be successful. And we certainly don’t anticipate this to be a 2015 event.
Nevertheless, we are somewhat more positive going into 2015, as industry competitors shrink, coupled with less uncertainty in the broader economy and lower energy pricing acting as a tail wind for consumer discretionary spend. Decreased uncertainty is being aided by fewer consumer stifling measures, such as higher taxes and healthcare premiums, being imposed on the economy by the Obama administration. That being said, we continue to be concerned about the crowding out effect that higher health care premiums, along with the widening gap between wages and price inflation, will have on discretionary spend. In 2015, we believe unemployment will improve, although wage growth will continue to be sluggish. Thus, it is our expectation that consumer spend will remain soft, but better than 2014. Lower energy prices could be a real catalyst promoting higher spend.
Looking to industry demand, we believe visitation and spending will be up slightly in 2015. Further upside is limited as consumer wherewithal is still challenged. Better convention volumes in Las Vegas will help performance in 2015, but less than the prior year. On the supply side, capacity additions have been fully absorbed in Las Vegas. Along the Atlantic Coast, near-term supply is greatly muted versus prior years. We forecast supply to grow by 3.5 percent over the next two years, which includes the Horseshoe Baltimore, which opened in August 2014, and a SugarHouse expansion (Philadelphia).
Away from Atlantic City, we estimate the regional markets will experience modest revenue gains and flat EBITDA. Most regional markets will somewhat benefit from less new regional supply, easy year-over-year comparatives (inclement weather impacted several markets in 2014), lower gas prices in 2015 and continued preference toward traveling closer to home. Next year, we will be watching how companies further align their cost structures to slightly higher revenues after rapidly reducing costs from 2011 into 2014. We expect little can be done to further reduce costs, and some operators may have to add expense to fill gaps left behind as significant cost cuts were implemented. Our review of the regional market clearly indicates that regional gaming properties continue to be under pressure as the consumer remains frugal (especially the lower-end patron) and several operators opted to increase promotional spend.
We believe Internet gaming will roll out on a state-by-state basis and not pass at the federal level. With the Republican Congress soon to be in place, this is pretty much a certainty now. The first big test of online gaming is underway in New Jersey as operators began offering all casino games late in 2013. The rollout has been a giant flop. In fact, we recently reduced our 2015 revenue estimate from $275 million to $150 million. The next catalyst for growth of gaming in N.J. will be the launch of PokerStars, which we expect early in 2015.
Todd Eilers
Director of Research
Eilers Research, LLC
Our comments are focused on the gaming equipment and technology sector.
In 2014 we saw a drop in overall slot machine demand due to the conclusion of the Canadian VLT replacement cycle, ramping down of the Illinois VGT market and general weakness in U.S. gross gaming revenue (GGR) trends. This lack of organic growth combined with access to cheap debt led to continued industry consolidation with GTECH acquiring IGT, Scientific Games buying Bally, Aristocrat acquiring VGT and Global Cash Access buying Multimedia Games.
Looking forward to 2015, we believe the focus for many of the major gaming suppliers will be integrating newly acquired companies and achieving cost synergies with a focus on paying down acquisition related debt. In addition to integration efforts, we look for gaming suppliers to focus on international growth and to ramp up their interactive gaming efforts mainly in the social casino sector, which has quickly emerged as the primary growth engine for the gaming equipment and technology sector.
In terms of U.S. slot demand, we look for the market to remain challenging in 2015 with game sales essentially flat versus 2014 at roughly 75,000 games sold. In an effort to revive sales, we look for suppliers to focus more attention on games that appeal to a younger generation including more skill-based concepts with certain markets such as Atlantic City and Nevada encouraging these efforts. We also look for continued Class II market expansion (now approximately 56,000 games installed) driven by a more liberal NIGC stance on one-touch bingo and tribes seeking leverage in upcoming compact negotiations. Outside of North America, we highlight the introduction of video lottery terminals (VLTs) in Greece as a sizable growth opportunity for the gaming equipment sector with 16,500 games expected to be in operation by the end of 2015 and 35,000 games over the next two years.
As for real money i-gaming, 2014 was disappointing with total GGR for Delaware, Nevada and New Jersey coming in well below most industry forecasts combined with the lack of any new jurisdictions approved. Looking forward, we believe California and Pennsylvania are the next most likely states to approve some form of i-gaming. However, even with new jurisdictions approved, we continue to highlight the social casino industry as a more near-term growth driver for the industry as there are no jurisdictional approvals and/or regulatory hurdles. According to our most recent social casino tracker, we estimate the market will reach $2.7 billion in 2014 versus the U.S. real money i-gaming market at only $145 million.
In summary, we believe the top stories for 2015 will likely be M&A integration, Greece VLTs and Interactive gaming growth led by social casino gaming.
Frank Fantini
CEO
Fantini Research
The gaming industry is becoming more complex as technology and business models converge and globalization accelerates.
Whole new parts of the industry have come into being, such as social gaming, and casino operators are developing new structures, including splitting into asset-light operating companies and real estate investment trusts, known as REITs.
Distinctions are blurring.
Gambling companies now offer non-gambling free play in the booming social gaming space.
Technology companies, which once just supplied slot machines and systems to casinos, are now players with interactive gaming websites.
And, thanks to mergers, the largest are lottery companies, too.
Bookmakers, who once boringly ran betting shops in the United Kingdom, have become whiz-bang global Internet companies offering casino, as well as sports, betting.
International expansion is creating huge multinationals with headquarters in one country, stock listings in others and operations in multiple countries.
Consider IGT and GTECH after they merge.
The new GTECH will be headquartered in the U.K. with production in Nevada and Canada, global lottery business headquartered in Connecticut, online and social gaming everywhere, and run mainly by Italian executives.
It’s a long way in a short time from when IGT was just a slot maker in Reno and GTECH was an Italian lottery company name Lottomatica.
Globalization extends to casino companies, too.
The number of multinational casino operators was once scant. Not today. A partial list: Las Vegas Sands, Wynn Resorts, MGM Resorts, Genting, Melco Crown, Crown Gaming, NagaCorp. Heck, even U.S. regional operator Pinnacle Entertainment owns part of a casino resort in Vietnam.
Such convergence and globalization will continue, perhaps even accelerate, in 2015.
Here are some specifics for the new year:
Regional revival. The recovering U.S. economy should take long-suffering casino operators with it. Those companies, having slashed expenses and reduced debt, should fatten their bottom lines—and stock prices.
Macau’s moment of truth. The first of the huge wave of new mega resorts opens next year at Melco Crown’s Studio City.
The question: Is Macau capacity constrained and ready to resurge with new casino resorts? Or is new capacity in a declining market a recipe for woe?
Sports betting. Legalized U.S. sports betting is inevitable, though probably not in 2015. And, if operators can offer in-game betting on mobile devices, sports betting will be a big business.
U.S. Online gaming. If California and Pennsylvania legalize i-gaming, it will spur legalization elsewhere. If not, the sector will continue to be insignificant. As for passage of a national law, there isn’t much chance of Congress reaching a consensus on a ban or legalization.
Stealthy online growth. There is one place where online gambling is growing—state lotteries.
A growing number of states are starting online lottery sales, a trend that will broaden out into types of games as well as geographically. That also makes it harder to get a national bill as more congressional delegations now have their state lotteries to protect.
Interest rates are a risk worth watching. Gaming companies continue to carry a lot of debt, including some of the largest supplier companies thanks to all their mergers.
If interest rates rise meaningfully next year, investors will be wise to move strong balance sheets up on their priority list of preferred attributes.
Grant Eve
Partner
JOSEPH EVE, CPAs and Consultants
Our firm audits 50 to 60 casinos on an annual basis and consults with several more on different engagements. In completing these audits and other AUP/Consulting engagements, we are fortunate enough to see many different facilities and the changes they experience on a year-over-year basis. In 2014, we saw increased scrutiny and resources being allocated to regulations, specifically in Title 31/Bank Secrecy Act (BSA) compliance.
The Financial Crimes Enforcement Network (FinCEN) has set the tone that casinos, as financial institutions, need to be aware of their customers’ source of funds and have proper due diligence procedures in place. This is covered under the regulations published in the Code of Federal Register (CFR) §1021.210(b)(2)(v)(A) as “When required by this chapter, the name, address, social security number, and other information, and verification of the same, of a person.” Obviously, this is a very broad regulation with stating “and other information” and is interpreted differently. Jennifer Calvery was named director of FinCEN in the fall of 2012. Since then, she has spoken at specific gaming related conferences providing guidance on FinCEN’s expectations of casinos regarding Title 31 compliance. Calvery stated at the Bank Secrecy Act Conference in Las Vegas in June 2014, “Casinos are required to be aware of a customer’s source of funds under current AML requirements.” She also stated, “Significant amounts of money coming in from jurisdictions reported to have high crime or corruption present greater risks to you. Under a risk-based approach, these situations represent times when you need to learn more about your customer and his or her source of wealth to identify suspicious activity.” With her remarks, it is evident FinCEN’s interpretation of CFR §1021.210(b)(2)(v)(A) includes source of funds as “other information.” Casinos need to embrace due diligence procedures while using a risk-based approach to anti-money laundering, and there is no one-size-fits-all approach that will be sufficient in 2015. When analyzing risk at your facility, some factors that should be considered are your casino’s location, games offered, financial services available, wire transfer activity, compliance committee structure, CTR filings, SAR filings, defense SAR procedures, watch list procedures, OFAC compliance, Politically Exposed Person (PEP) procedures, due diligence procedures, enhanced due diligence procedures, Title 31 audit procedures and use of technology available.
When your facility is developing or updating your due diligence procedures, ensure that they are consistent and systematic. It is also important that your policies and procedures are documented and your analysis is documented and retained for review. No department should act in a silo when it comes to AML compliance, there needs to be back of the house (due diligence, research, filing) and front of the house communication (customer identification, marketing, casino hosts) between multiple departments to effectively manage your Title 31 risk.
There is no doubt that we will continue to see increased scrutiny in Title 31/BSA compliance in 2015, which will ultimately continue to change control environments in casinos throughout the United States.
Rich Baldwin
Senior Managing Director
Union Gaming Analytics
Unfortunately in 2014 we saw the potential downsides of a maturing casino market with closures and job losses in New Jersey and Mississippi. Going into 2015 we have begun to see modest signs of stabilization in the regional gaming markets and continued signs of sustainable growth in Las Vegas. We’re hopeful that lower gas prices and improving consumer confidence will help maintain this stability in what appears to be a relatively quiet year before the next wave of new casino openings begins.
We expect 2015 to see less consolidation and focus more on what’s coming next for gaming. Gaming suppliers underwent a much needed industry rationalization in 2014 and we expect gaming operators in 2015 to examine how they can best prepare themselves for the next stage of gaming. The large projects proposed for the next wave of expansion present exciting opportunities with large integrated resorts which will offer more than just gaming. With these opportunities also comes risk of market saturation and having existing facilities fall behind, putting their jobs and economic benefits for their communities at risk.
The balancing act of ushering in bigger and better facilities while protecting existing jobs and investments requires smart policy and enlightened decisions from lawmakers and gaming regulators. While it is tempting to extract high gaming taxes and outsized investments for the benefit of their constituents, policymakers should be wary of how delicate the balance is. A sustainable casino located in a market with sufficient demand provides a strong economic driver that employs workers and fills state coffers, while providing exciting entertainment options for the community. An unsustainable casino hampered by excessive competition, regulation or taxes will lead to lower investment, less realized tax revenue and the risk of closure.
With the next few years bringing Massachusetts into the regional gaming market and New York, Pennsylvania and Maryland welcoming significant new additions to their existing gaming markets, 2015 can serve as a time for policymakers in all gaming states to reflect on where their gaming industry stands. Policymakers should take stock of the current contributions the gaming industry makes to their economy and tax base, and assess what can be reasonably expected to occur as the industry matures further and saturation becomes a more distinct possibility.
We hope policymakers use 2015 to proactively prepare for change as opposed to reacting in the coming years when lower tax revenues and potential casino closures become a reality. Proper policy does not come just from logical decisions about gaming expansion or gaming tax rates, it also requires thoughtful analysis of appropriate investment levels for casino projects and an honest assessment of how much gaming the market can support.
While we believe it is inevitable there will be winners and losers from change in the marketplace, we also believe good decisions made both by those in the industry and those who oversee it lead to the best outcomes. Gaming has reached new levels of acceptance and patronage nationwide. Billion dollar proposals show casino operators have confidence in the market to support large projects. By setting good policy that reflects a changing marketplace, policymakers can ensure the industry delivers on the benefits it has provided in the past and promises to bring in the future.
John Acres
Founder
Acres 4.0
Faced with rising costs and growing competition, casinos must find new ways to please players while controlling expenses. Fortunately, 2015 will bring our industry a new set of mobile technologies that simultaneously improve player experiences, help employees do their jobs better and lower costs.
Playersoft Technologies, Resort Advantage and we at Acres are just a few of the vendors that provide new efficiencies through mobile technology. Very different than mobile gaming, these efficiency technologies replace ancient two-way radios with more powerful voice and text communication between employees and players.
These products extend player-tracking services directly to player phones, whether through text, apps or voice, allowing you to reach players anytime and everywhere. You’ll save the cost of upgraded kiosks, bigger player club booths and the expense of upgrading traditional player tracking displays and systems.
Mobile technologies also better connect casino employees to players. Once those clunky two-way radios are replaced with mobile devices, your employees can instantly respond to machine malfunctions, bill jams and hand paid jackpots. More advanced mobile systems connect hosts to players too. For example, we’ve developed a system that lets hosts know not only when and where players are in the casino, but also whether they are winning or losing. These hosts can precisely evaluate when a visit, a comp or a bonus is justified and deliver it in person or electronically.
Coming mobile technology will turn your entire resort into a highly effective customer service system. Example: A premium player arrives early at the hotel to find her special-needs room is not ready. An electronic message instructs the next available housekeeper to clean a room matching those needs. When the room is finished, the housekeeper touches a button on a mobile app, which triggers a text message to the player that her room is now ready.
These service improvements will soon also find their way to restaurant and buffet reservations, valet, slot hosts, table game hosts, front-line workers and managers. Chores of documentation and escalation of problems to supervisors or skilled service providers will all become automatic.
Early adopters of this technology have seen labor savings of 20 percent or more. That’s labor you can either eliminate from your budget or redeploy to better serve your players.
Mobile technology has already changed our personal lives. 2015 promises to be the breakout year for casinos to use that same mobile technology to better serve their players.
Jim Ryan
CEO
Pala Interactive
Online gaming is still a nascent industry in the U.S., regulated by very few states. In 2014, we saw more players emerge in the online real-money gaming space—from brick-and-mortar casinos moving online to pure online plays—and we believe that 2015 will bring regulation in new states as well as more unique and robust offerings. The two main states on our minds lately are New Jersey and California.
New Jersey is one of the first and the largest states to legalize online real-money gaming; in fact, PalaCasino.com just made its debut into this market in November where it joined several big players in the industry. New Jersey is fairly new to the online gaming market, as it just became legal in November 2013.
In 2014, the online gaming industry has had to deal with a number of growing pains, which included challenges with the geolocation of New Jersey residents and the inability to use more traditional methods of payment such as credit cards. These factors, in addition to general lack of awareness of the new regulated online gaming market, have restricted growth to date in the New Jersey market. We believe that as some of these challenges are mitigated and awareness of online entertainment options increases, the New Jersey market will in turn generate meaningful growth from its current levels.
2014 was a critical year for the evolution of online gaming in the state of California. This year, a group of influential tribes and card rooms agreed to cooperate with the objective of developing a unified online poker bill. We are hopeful that this momentum will continue through 2015 so that we’ll have more time to use that collective voice to settle on a final, consolidated bill to gain support in the Legislature, which is the major step toward bringing the online gaming market to California.
The gaps that separate the respective stakeholders are few. We are optimistic that, with the benefit of time and open discussions, a unified position amongst the parties will be reached.
As the U.S. real-money gaming market continues to evolve, we at Pala Interactive have every intention of growing with it and tailoring our offering to reach as wide an audience as possible. We look forward to seeing what 2015 will bring.
Jim Murren
Chairman and Chief Executive Officer
MGM Resorts International
Happy New Year! Our industry wrapped up 2014 with encouraging economic indicators, and we look ahead to what promises to be another exciting year. The second half of this decade will bring significant opportunity for growth in our sector.
Today’s gaming and hospitality customers are more discriminating than ever when it comes to deciding how to spend their time. Today’s customers have more sophisticated tastes while remaining highly value-conscious. They have access to large amounts of information available via the web about our resorts, as well as all of our competitors’ offerings, before they even make an inquiry to our properties about a visit.
In response, companies in our industry are continuing to evolve as they better understand how customers make their travel decisions. The newest generation of travelers wants myriad experiences. They want to be a part of the experience, not just “experiencing the experience.”
They also place social responsibility and environmental sustainability high on their list of priorities when choosing where to spend their time. As a result, companies in our industry, as well as many other industries, are taking a careful look inward to better understand how reputation is connected to the bottom line. For them, character—corporate character—matters.
During 2014, consumer confidence levels in the United States hit record highs, although there continues to be a holdover from the recession. That’s very important for MGM Resorts, which has the largest presence on the Las Vegas Strip with 10 resorts and 42,000 hotel rooms and an increasing presence domestically and internationally. People, in general, are feeling better about job security, the low interest rate environment and declining energy prices, and we’re seeing that confidence reflected in domestic and international visitation as well as conference and convention business.
The convention business on the Strip is accelerating, and we at MGM continue to invest where we see opportunity. To meet increasing demand, we’re in the process of adding 350,000 square feet to our existing 1.7 million-square-foot Mandalay Convention Center, which will be powered in large part by solar energy collected on the rooftop.
As the percentage of gaming revenue among overall revenue continues to decline, day clubs and nightclubs on the Strip continue to rise in popularity. Electronic music is big. Hakkasan at MGM Grand Las Vegas hosted more than 700,000 guests last year. In 2014, we opened the Festival Lot across from Luxor to host outdoor concert events. In May 2015, we’ll host Rock in Rio at its new outdoor event site north of Circus Circus. The arena and theaters are also busy, with more than 7 million tickets sold annually.
I would be remiss if I failed to mention the tremendous amount of activity and opportunity that our industry is experiencing on the international front. Resort development is humming on the Cotai Strip in Macau—including MGM Cotai that is scheduled for opening in 2016. It’s part of the Macau government’s continuous efforts to expand the region’s economic activity. The region is still in a relatively early stage as the world’s busiest gaming jurisdiction, and its nongaming entertainment and hospitality landscape is still evolving. MGM Cotai, valued at $2.9 billion, will include Spectacle, an entertainment and retail complex designed by David Rockwell. It will be an unprecedented opportunity to invite visitors to experience our entertainment expertise, creating a versatile stage as Macau’s destination entertainment options grow and mature.
As we embark on the new year, I would like to thank the men and women who work so hard on the front lines of tourism and travel to make our visitors feel comfortable and welcome. Your contributions and your commitment make up the very fabric of our vibrant industry. You are the root of our success. I sincerely thank you and wish you a remarkable 2015.
Eric Fisher
President of Gaming
Crane Payment Innovations (CPI)
It’s always interesting to go back and read previous forecasts. For the past few years we wondered if an economic malaise occurring in several mature gaming markets would represent a “new norm.” Well, the M&A activity that has occurred in the past year certainly has created a new landscape—one that will redefine the industry. And the last word anyone would use, given the context of how the industry has been operating, is normal.
These transformative times, driven by consolidation, will impact all of us in some way. At CPI, we have felt this firsthand. Our new entity, created in December 2013 when Crane Co. acquired MEI, has achieved stability, and we are moving forward as a combined company. It took a significant amount of work to get to this point.
Now, on the back end of that work and armed with the knowledge that there is still more work to come, we can clearly see the benefits. The combined strength of our coin and note product portfolios offers customers a newfound ability to receive comprehensive solutions that impact cash management from the gaming floor to the back room. And our focus on products, alongside our continued commitment to invest more than 10 percent of revenue in R&D, will yield newfound efficiencies and again redefine expectations for automated payment systems.
The gaming industry has a history of rewarding superior technology. There is no reason to believe that will change. CPI now has more than one million SC note acceptors operating in the field, 150,000 of which are installed with EASITRAX Soft Count. This success is a testament to the importance operators place on products that add value. They change the game and, as a result, profitability improves from a better way of doing things—with more efficient processes and an improved gaming experience.
I’m confident that consolidated resources, if focused on driving technology, can accomplish the same results for the industry overall. We’re already seeing this at CPI. There’s no reason to think consolidation can’t positively impact all aspects of our industry.
Becoming more efficient will help us in mature markets such as North America and Europe. And it will lay a solid foundation in emerging markets such as Asia (where we prepare for more investment in Macau and Manila, along with new jurisdictions) and the ever-expanding list of VLT networks around the world.
We at CPI believe in the future of gaming. Some of that belief is driven by the fact that we are not in normal times. The industry is evolving and will continue to evolve. And that evolution will lead to prosperity. There is no doubt that consolidation is difficult. But it gives us a unique opportunity to find a better way to do things. It will lead to progress.
I’m excited about the future for CPI given what our company can now represent. And there are two distinct reasons for my optimism: 1) I still see opportunities for growth through our continuous innovation and improvement of superior technology, and 2) I believe, having witnessed the impact of consolidation firsthand, that the changes we see today will ultimately benefit the industry over time.
Travis Foley
Executive Vice President Operations, Americas
BMM Testlabs—Americas
2014 was another record year for BMM as we celebrated 33 years in the gaming industry. BMM continues to uphold our core values: integrity, quality, productivity, responsiveness and accountability, ensuring that we deliver world-class testing and certification services with predictability and consistency, across the globe.
As we look back over 2014, it has been an incredible year for change in our industry. The initial successes from gaming expansion in North America began to see the significant impact of oversaturation in many markets. Casinos have closed as others struggle to remain competitive and the industry seeks to find its equilibrium. The consolidation of the manufacturing industry experienced some of the most significant changes yet, with the results of the mergers still to be seen. Undoubtedly these changes will create challenges as well as opportunities across the whole industry.
As innovation prevails, there will no doubt be a drive to find the perfect gaming product to appeal to the younger generation. This will result in continued pressure on manufacturers and a greater burden on R&D to develop technologies to transform how the patron will access gaming and what the overall experience can deliver. Will it be conventional, online or mobile? Will it be social or skill-based? In 2015 we will begin to find out.
At BMM we are already seeing these technologies start to emerge and expect to see them deployed in the market within the next year. A major challenge for these technologies, though, is ensuring that government regulators receive the gaming and technology education to deal with what is here now and what is coming. Similarly, manufacturers need to understand the objectives of regulators in ensuring the integrity and accountability of new technology. Manufacturers must ensure that they take the time to understand the intent of existing requirements and how those will translate into requirements on new technology.
For testing laboratories, 2015 should be a year of progress. Laboratories themselves must continue to find ways to exceed their obligations to the regulators they serve, the manufacturers whose products they test and in the services they provide above and beyond testing. Laboratories must create more efficient and cost effective ways to perform the services they provide. The quality of testing must improve. At BMM we have developed and will continue to aggressively invest in the development of automation tools. The use of automation can greatly increase testing time frames, reduce human error and result in reproducible outcomes that can quickly be communicated to the manufacturer of the equipment.
To improve the quality of testing, the few remaining regulators who solely rely upon a single private testing laboratory, must take into consideration the benefits of a multi-lab environment. Multiple independent laboratories, while working together, can ensure a higher quality of testing services, competitive pricing, add transparency and enable more timely delivery of competitive products to the market place.
For 2015, BMM stands ready to support regulators and manufacturers in the U.S. and worldwide as the gaming industry prepares to accommodate new and exciting technologies and gaming experiences. We remain open to working together with our competitors and key industry stakeholders to ensure the highest levels of quality, transparency and the expedient advancement of technology regulations and standards.
BMM Testlabs wishes a prosperous and successful 2015 to all.
Nick Farley
President
Eclipse Compliance Testing
2014 saw mass consolidation and right-sizing throughout the gaming industry. Most notable were the massive slot machine companies that were acquired by strong lottery providers. 2015 will likely continue this trend. Casino operators will continue to shutter massive structures as competition forces the survival of the fittest. 2015 may also see the fall or restructuring of massive gaming companies that leveraged themselves over the years to a point where loan obligations cannot be met.
But the big question still remains: Will the industry begin to embrace the cost savings and efficiencies brought about by a competitive marketplace in compliance testing services? As the behemoth corporations in our beloved gaming industry consolidate and right-size, the compliance testing aspect of our industry continues to be dominated by one company, which charges as much money as it wants, and takes as little or as much time as it wishes to conduct its testing.
While very few people pay attention to the handful of unsung independent compliance testing laboratories (ITLs), they play an integral part to ensuring the integrity of gaming devices and systems. The gaming device manufacturers and regulators have created a protected environment for one ITL, whether intentional or not, which seems to be untouchable. Protecting a sole compliance service provider to any industry is contrary to the purpose of protecting the public.
This coddled ITL industry has seen only a couple of competitors emerge over the years to attempt to complete against this protected company. The protected company has seen unparalleled growth through the economic downturn of the past decade, in part due to regulatory support and the support of the gaming industry giant corporations wishing to preserve the preferred relationships that they enjoy with this compliance testing behemoth.
Consolidation typically brings cost-cutting measures. For the gaming industry to truly enjoy great efficiencies and cost-savings, it must embrace a competitive environment in the compliance testing realm, and not just support one or two ITLs. Multiple ITLs (three or more) must be embraced and supported by regulators and gaming product suppliers alike in order for this industry to return to prosperity.
For those of you old enough to remember when telephone service was handled by “The Phone Company” before divestiture and the emergence of the “Baby Bells,” may recall having to pay “long distance” charges to call someone in another area code. Or you may recall the logistical nightmares of having your telephone installed, and having to lease the phone from the phone company. We were all happy to do so because we only knew one paradigm that The Phone Company created. Now we have multiple telephone companies competing for our business, providing reliable service, developing incredible technology and driving prices lower. I cannot think of anyone who currently pays long distance charges to call someone in another area code, and technologies are evolving that allow us to speak with people in other countries for free.
If the gaming industry regulators and product suppliers do not support true competition in ITL compliance testing with three or more ITLs, then this industry will suffer the same unknowing pains we all suffered more than 30 years ago when we were at the mercy of The Phone Company, as a sole source, to provide us with telephone service.
The gaming industry cannot ignore the fact that it must preserve competition in all aspects in order to assure consumer confidence and the integrity of regulated gaming. Such competitive preservation must be realized in the support of multiple ITLs. Now is the time for regulators to open the door to multiple ITLs without exorbitant fees, and for product suppliers to engage the services of multiple ITLs to realize cost savings and efficiencies.