Analysis
By Cole Boehler
The gaming business is now more than ever a technologically driven one.
If you don't believe that, spend two hours with Tim Carson as the Montana Tavern Times did Dec. 13.
Carson is the former president of Summit Gaming and now owner of Amusement Services, a gaming and amusement route operator out of Billings.
But Carson's vision isn't focused on one technological development. He instead sees numerous interrelated changes coming that form a significantly different gaming business landscape down the road.
The chief disruption most immediately facing gaming machine owners and operators is the U.S. Treasury's release of a new five-dollar bill coming in February, Carson says.
So, update the bill acceptors and away we go, right?
Not right at all, according to Carson.
He provides background for the ensuing discussion:
The Montana gaming jurisdiction is unique in the nation, maybe the world, Carson notes. Old, obsolete equipment likely makes up a greater portion of this state's inventory than any other jurisdiction, he says, with many machines surviving well past any expected life-cycle.
When machine gaming was first legalized here over two decades ago there were close to 20 equipment manufacturers licensed to do business in the state. Now, effectively there are just five.
When those other manufacturers departed, they ceased offering any support--service, software upgrades and in many instances, even parts--for these Montana-specific machines. And as those machines have aged, most have lagged in earnings performance as the modern gear simply offers players so much more entertainment quality.
Montana' aging inventory
Yet many smaller operators who own their own equipment have hung onto the relics, keeping them alive with chewing gum and baling wire in typical Montana style.
"A personal computer's life is 18 months, maybe two years," Carson notes, before it needs substantial upgrades to software and/or hardware. To be state-of-the-art, it would need replacement. "How often do you upgrade your cell phone? Yet we have hundreds of machines that are over 20 years old here," he says.
Even some machines--well over 1,000 of them--built by manufacturers still active in the state are so old as to be beyond upgrades.
Carson says with the coming of the new five-dollar bills, several scenarios await machine owners.
Scenario #1: bill acceptors cannot be updated at all.
This is a worst-case scenario that will gradually force most of these machines into boat anchor status, Carson contends, noting some of these units have nevertheless been upgraded for multi-game play.
There are 22 Reno Keno machines that cannot be upgraded, 160 Dynamos, approximately 1,900 IGTs, 39 Merits, six Mills-Jennings, 38 Summits, 97 USGs, 1,264 VLCs, 177 Big Cities, 105 Leisure Times, and two G.I.I.s.
That's around 3,825 machines--almost 23 percent of the state's inventory--that cannot be upgraded to take the new five-spots. The rest of the state's machines will need replacement bill acceptors or acceptor software updates.
Note: The entire IGT Player's Edge series is not upgradable. During the production run of the Select-A-Game series, IGT switched from the JCM brand DVB-series bill acceptors to the WBA-10s. The DVBs cannot be upgraded or replaced, whereas the WBAs can be replaced by newer WBA-12s...at a cost, which we will look at later. Though it can't be determined precisely how many of these Select-A-Game IGT's have the DVBs versus WBAs, IGT Montana Sales Manager Terry Geurin estimates about half are upgradable.
This leaves operators of the non-upgradable gear with a few options, none real good.
No real good options
Carson notes the five-dollar bill is still the most popular denomination in perhaps the majority of locations. Without the upgrades, operators will be faced with trying to hoard the old bills so customers can use them in the outdated machines.
The trouble is, when new currency is issued, banks begin pulling the old bills out of circulation. They will become increasingly rare.
Further, the condition of old bills will be marginal and deteriorating, making acceptance by bill validators increasingly troublesome. Besides, the old bill acceptors, themselves, will be suffering from wear and tear and filth and will become continuously more cantankerous.
A player who cannot get a machine to accept his five will be frustrated and will likely leave or, best case perhaps, will be increasingly pestering bartenders and attendants for different bills, driving up labor costs.
Carson says in his view these "work-arounds" will cost operators enough on the labor side and lose them enough on the revenue side that "they may as well bite the bullet and make the change."
Scenario #2 - Your machines may have the JCM WBA-10 or WBA-11 bill validators.
These can be replaced but not upgraded (memory is too limited), at a cost ranging from perhaps as low as $350, up to $950 each, depending upon type and VGM make. The WBA-10s and their replacement, WBA-12s, have a flash memory. The WBA-11s and their replacement, the WBA-13s, have an EPROM "chip" memory.
In this case, machine manufacturers can provide the replacement bill acceptor kits or, if you are vended, your vendor will be the one to acquire the device, then work with location operators on installation. Be aware, this replacement cycle will take time and it will likely be first-come, first-serve.
Also be aware that the replacement kits are spendy enough that vendors may not be willing to invest these sums in marginal machines or marginal locations.
Carson said, expense aside, new or refurbished bill validators will yield an acceptance rate 35 percent higher than old, worn and dirty devices, which translates into more machine play and less labor in overcoming hesitant validators.
Scenario #3 - Your newer, modern machines already have the WBA-12 or WBA-13 acceptors.
These devices will not need to be replaced, but will nevertheless need to be upgraded either with new chips containing the code to validate the new fives, or else will need to have the code in the flash memory replaced.
Either way, you'll be spending about $50 per device, but breathing easier than the brethren eyeing obsolete machines or validator replacement. Your route vendor or manufacturer can provide the new chips or re-flash service.
Carson says the new five-dollar bill could cause ripple effects throughout the industry.
--Some smaller operators who own their own machines which are about to enter this new obsolescence cycle may not have the wherewithal to replace or upgrade machines or even the bill acceptors. They face a continuing increase in costs and decline in income which may ultimately prompt a few to close their doors, adding to ownership churn in licenses that is already at an estimated 25 percent annually.
--Some location operators who own their own machines may turn to a vending arrangement in order to acquire the necessary equipment upgrades and/or replacement, if the vendor finds the proposition financially viable.
--In the face of these necessary and significant investments, some smaller, more marginal vendors, may opt out of the business, adding to the portfolio of those who opt to stay in.
Carson maintains that proper machine mix is more important to revenue--and profit--than is machine quantity: four good machines will well out-earn eight poor ones, he says. Thus he anticipates this round of obsolescence will see more newer machines in service and significantly fewer of the aging devices, likely meaning a net decrease in the total number of machines in service.
As an aside, Carson says the total number of permits issued--exclusive of the number of machines in service--may not decline, though, as the state's new electronic permitting has made machine replacement or swapping so much easier and less expensive, leading to more frequent equipment shuffles and more issued permits.
Forced obsolescence? Don't bet on it.
Cynics will contend that manufacturers intentionally force obsolescence on equipment owners in order to drive sales of new equipment. Readers should keep in mind that Carson no longer has a stake in the manufacturing or sales end of the industry. As of route vendor, to him this problem represents pure expense.
And from IGT's Geurin's perspective, nothing could be further from the truth and he says he is sensitive to the unfairness of the allegation.
He has personally and repeatedly met with JCM representatives, even their engineers, using the muscle of IGT, the world's largest gaming machine manufacturer and JCM's biggest customer, to see if some possible way could be found to allow continued use of the old-series bill validators.
"I appealed to them based on the Montana market realities," he says.
But, he says, he ultimately came away from these futile explorations as a believer that nothing can be done and, further, that, maybe in the long run, Montana operators will benefit.
Conterfeiting is a significant problem.
First, Geurin notes that counterfeiting operations, using the very latest duplication and reproduction technology, are making extremely high quality counterfeit bills that can fool the old, unsophisticated bill validators. This is a significant problem in larger gaming venues like Nevada, less so in Montana...for now.
The U.S. Treasury must protect the integrity of the currency so is introducing all kinds of advances into currency production that make counterfeiting much more difficult.
Bill validators, therefore, must use equally more sophisticated scanning technology and the software to drive it. More sophistication means exponentially more computer code and that takes more memory. The old WBA-10s and -11s have one megabyte of memory. The new series WBA-12s and 13s have four megabytes.
Geurin reasoned and argued with JCM, he told the Tavern Times, that if some code could be deleted from the memory, more new code could be added. The bill acceptors now contain code to validate 50- and 100-dollar bills, necessary in markets like Nevada, but whose function is inaccessible in Montana. Geurin thought that if the code dedicated to 50s and 100s could be erased and some memory freed up, code for the new fives could be added.
Geurin says the JCM engineers took the time to find out, but concluded the new bills and new code required to validate them is so complex and expansive, the scheme wouldn't work from an engineering perspective. There just wasn't enough memory.
But more importantly, Geurin says, he realized, after talking to JCM, that there is a counterfeit problem with the old fives and the new fives are necessary to protect the nation's currency and to deter counterfeiting, but even more so to protect the owners of the devices that could be cheated.
Conterfeiters coming to Montana?
The counterfeits that have been fooling the old technology may soon be migrating to, and concentrating in, places where there are old-style bill acceptors without the new, sophisticated security features. And that is Montana, Geurin says, if we don't upgrade these devices to match the upgraded and more secure new five-dollar bills.
"Counterfeiters may come to realize Montana machines' bill acceptors can be defeated. We'd be an attractive target. We need the new program for our own security. The currency changes had to be done."
He said he is working closely with IGT to create some programs that could in some way ease the upgrade pain, and they are looking at a trade-in allowance, even though the obsolete machines will cost IGT money to dispose of or part-out.
Further, Geurin says, he believes he may have negotiated a substantially reduced price for the WBA-10 to -12 upgrades, down from perhaps $700-$800 to $350-$400. He will have details soon, he says.
"We've been here in Montana for more than 20 years. IGT has supported these (small-jurisdiction-specific) machines more than in any other market."
Carson sympathizes with Geurin's dilemma, especially as he'll be feeling plenty of the replacement pinch in his own vending operation.
"Don't shoot the messenger," he says, "but understand what's coming. Players will go someplace else if you're not upgrading.
"It's hard to take the pace of change," he adds. "Constant game software and even hardware upgrades, now bill acceptor hardware and software upgrades... The five-dollar bill issue is just causing it all to move faster. But we can't get caught behind antiquated equipment or we may as well try to sell or get out of the business."
4,000 VGMs can't be ungraded; 4,000 more need new validators; 9,000 need new code.
But the numbers are sobering: Almost 4,000 machines that won't take the new fives, nor can ever be brought anywhere neart modern standards; perhaps another 4,000 that will need new bill validators at perhaps an average of $700 each (that's about $2.8 million), plus perhaps another 9,000 machines that, at minimum, will get the software upgrades at $50 each (another $450,000).
If just one-fourth of the obsolete machines are replaced with brand new devices, that could, at $11,000 each, add $11 million to the tab over just a year or two. Now a rational estimate could amount to almost $14 million in new costs with no directly associated increase in revenue.
Then consider that perhaps not too far into the future, the day of the impact printer may also be over, to be replaced with the more modern thermal printers. That development will require lawmakers and regulators to completely rethink and redesign compliance and record-keeping regimens.
It could also force a whole new round of hardware and software replacement and upgrades with all the associated costs.
"The industry is reinventing itself as it has all along, but will now be doing so at an ever increasing velocity," Carson says.
"In the last year we have upgraded every single one of our machines at least once, some twice. But you have to see more revenue to justify the expense of the upgrades or else..."
Most importantly, as always there will be winners and losers. Those who cannot or won't adapt or keep up with the evolution--or revolution, if you prefer--may become the same kind of dinosaur as a forlorn old Mills Jennings keno machine.
Source: The Montana Tavern Times, January, 2008, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.