Despite the headline-grabbing rise of Asian casino markets, the US slots sector still has plenty of potential for growth, says Aristocrat
Aristocrat Technologies has been taking a fresh look at its slots and systems business in the light of recent gaming industry developments and changes in the wider world economy. Inside Asian Gaming met Nick Khin, President of Aristocrat Gaming Technologies Inc., the US arm of the operation, and David Punter, Marketing Director, Asia Pacific, for Aristocrat Technologies Australia, at this year’s Global Gaming Expo in Las Vegas. We asked them what they had learned from the review and what the market can expect from Aristocrat in 2010.
IAG: In June at G2E Asia in Macau, we spoke to Jamie Odell, Aristocrat’s Chief Executive Officer. At that time, the company was about to issue its strategic review. Can you tell us what has happened since then?
Nick Khin: “In August, we released our strategy, which we call ‘Play to Win’. It encompasses a number of initiatives. There are over 20 of them and it’s a global strategic approach.
“Many of the initiatives are focused on the jurisdiction we’re in right now—the United States—which makes up over 50% of Aristocrat’s global revenues. We have a number of game studios based here in Las Vegas already, and we are looking to invest more and essentially double the number of studios here in Las Vegas.
“We have a big gaming operations business here. It’s a participation business where we own the machines—Aristocrat machines—we put the product out on the floor and we either get a fee per day or a percentage of the coin that goes into those products. Currently we have more than 6,000 machines here in the US that are on ‘participation’.
How much of your revenue comes from participation?
NK: “It’s about 25% of our US revenues. As at June 2009, they [participation products] were earning on average US$43 dollars each [per machine] a day. There’s still a lot of room for growth in this area. It sounds impressive in terms of the number [of machines]. However if you actually look at the share that we have of the overall participation market in North America, it’s smaller than our current market share for machines sold [to casino operators] outright.
“We’re very focused on growing the number of machines that we have out on lease or participation, and also on growing our overall fee per day. A lot of the machines we have had out in the market have been there for a number of years. We will be refreshing the product offer with new titles and new themes, and will be replacing older machines with new ones.”
David Punter: “Licensing products is a big focus for us—such as our recent release Jaws [based on the Hollywood film franchise]. The North America market and our competitors Bally, IGT and Williams [WMS], have a lot of licensed themes driving a lot of recurring revenue for them. So an objective for Nick’s group and for the rest of Aristocrat is to get hold of some great licences that appeal to players and will grow our participation revenues .”
Is there any difference between ‘participation’ and ‘revenue share’?
NK: “The 2 terms are used interchangeably. I prefer to call it leasing. Operators tend not to use the word participation, because the thought of us participating in casino revenues is not immediately attractive. We call it leasing. In fact, the department we’ve set up [to manage it] is called Gaming Operations. That group is focused on growing our installed base and improving overall product performance.”
From speaking to contacts close to the regulator in Macau, it seems Macau is unlikely to approve revenue share agreements for slot machines. Do you have any perspective on that?
DP: “In Macau, you need a [gaming] licence or concession in order to take some cash out of the box, so what we have done there with the Viridian™ cabinet is a fee per day [arrangement] for providing the cabinet on the [casino] floor. Internally, we call it a licensing programme. It amounts to a fee per day for cabinets on the floor. What we provide the operators is a way to regularly update their software over a term of the contract. Some of the major casinos in Macau have adopted this as it provides flexibility for them to upgrade their floors without large amounts of capital outlay.
Is it a fixed fee?
DP: “Yes. For Asia Pacific, it works differently [from in the US] because our market shares are greater and some of our premium products make up large proportions of the Casino floors we offer combinations of outright sales and flexible fee per day options, roundabout effect is a net positive for us. With the other competitors [competing suppliers] offering products such as MONOPOLY and the Wizard of Oz [both WMS releases], they are only putting in smaller banks. But you know what we’ve done with successful products such as [Aristocrat’s] Fa Fa Fa—we have 10, 20 or 40 machines [on a floor] at a time.”
Over what period of time are the fee per day deals in Macau?
DP: “Traditionally, it’s been three year contracts and we review and renegotiate [on that cycle]. That’s manageable for us.”
Is the leasing model in the US helping you and the operators to compensate for the overall fall in market revenue?
NK: “Certainly, the latter parts of 2008 and into 2009 have been difficult times for the industry in total, whether you’re a supplier or whether you’re an operator. The Las Vegas market alone has been affected significantly. Convention business—the lifeblood of this town—is down 27% year-on-year as of today. That’s certainly had some impact on the operators.
“We at Aristocrat entered the recession with a fairly conservative and strong balance sheet. As a result, we have been able to leverage off that balance sheet and offer some pretty interesting types of deals and terms to operators, to really help them keep their floors fresh. I’d like to say they’ve taken us up on the offer and that they are increasing their ‘participation product’. However we haven’t seen a significant increase in the overall number of participation products from an industry perspective, but there has been a lot of interest in financing-type leases, lease-to-own arrangements and obviously payment terms.”
DP: “That’s happening in Asia Pacific as well, since in many cases you have the same stakeholders—MGM, Las Vegas Sands etc. They are looking for opportunities to get the product on the floor—which is great. So from our side, we’re looking at more flexible terms than we have previously.
“Asia Pacific is also quite small [as a market] when you look at the overall spread. Australia is still large, as is the US and bits of Europe. Japan is unique and has large volumes at times—volatile but strong. We are really looking at the company being realigned and structured to where its revenues and business are starting to grow and generate. That’s the US, Australia and New Zealand, Japan, and then Asia Pac sits in the rest of the world with Europe and South Africa.
“Going back to your first question about Play to Win, we’re looking at focusing on the right markets and the right segments, and delivering products specific to those markets and segments. That includes putting studios dedicated to those products sometimes physically in the region concerned, but in any case dedicated to those particular markets.
“That’s a bit of a change for Aristocrat, where in the past we might have taken from a big pool of products and then assigned them to different markets around the world.”
NK: “About 20% of what we showed on our stand at G2E this year was product developed locally [in Las Vegas]. That’s our highest proportion ever. The product we had in our ‘invited guest only room’ at G2E this year is product that’s come out of our Las Vegas-based ‘key concept innovation’ studio.
“We are putting a lot of focus on making sure our talent is in the right places and is close to the markets and understands the market requirements and can respond very quickly to that.
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“The other key initiative in the US that will probably flow on to Asia in the near future is we are investing in our stepper business; the mechanical reel business. Our G2E stand this year has a significant number of new stepper titles. Previously, Aristocrat was very focused on video gaming. We ignored that other piece of the market. If you look at North America, today 40% of the market is stepper, and you can’t [as a supplier] afford to be out of that. So we are looking at building our studio capabilities in that area over time. This is not something you can do overnight. It takes a bit of time. But we have a stable platform, a great looking box. We’ve invested in that in the last 18 months. Now it’s all about building great games.”
DP: “One of the bullet points you’re your readers in relation to our Play to Win strategy is about creating the best games and the best systems. A big focus there is on making use of customer insight and on developing initiatives led by the customer. We want to draw as much information out of the market as we can. There’s a greater focus on market research. In Macau for example we have test banking and customer-fed interaction. We have meetings with customers [casino operators] and players. That all leads back to making the best products and the best gaming solutions. Play to Win is a great strategy that all links back to delivering the best product to the market.”
NK: “A lot of the themed product we are seeing out there [in the market] right now is more what we would describe as ‘entertainment’ based. This type of product does appeal to a certain demographic of player. Themed product is certainly an area we have been more focused on of late and will continue to be.”
DP: “Jaws has been very successful.
NK: “Jaws is a good example of that, highly themed and feature rich. So when I talk about entertainment-style product, I’m talking about product that is fully themed, has a higher number of features and more frequent feature hit rates. We are looking at adding more of that style of product to our overall portfolio.
What work are you doing in the systems market?
NK: “We have a very large systems business here in North America. We have 265 casinos in the United States that use our systems. That’s 30% of the market.”
DP: “There’s a lot of development work that goes into the OASIS system and support.”
NK: “OASIS [Aristocrat OASIS 360™ Casino Management System] has always been a strong product. We pride ourselves on the strength of the accounting module. We truly believe the accounting module of our OASIS system is the best in the industry.
“We have also done a lot of work on our bonusing and marketing modules of OASIS. We have built a wide range of modules that basically bolt on to our core systems solution, and we are continuing to invest in it. We’re going to put another US$17 million of investment over the next couple of years over and above what we spend every year on R&D on OASIS. One of the key initiatives underway is to fully integrate our downloadable gaming solution into our OASIS platform. We are also working on our next version of our Sentinel player tracking module which will incorporate even more value-adding functionality. In today’s world, this is increasingly important. Operators need to understand who their customers are and understand their customers’ playing habits and trends, and they need to reward their loyalty.”
Are you now designing your games to fit around your system?
NK: “We actually run our games and systems businesses separately. Systems for us are about offering our customers the capability to understand their players and reward their players more. Our systems can communicate with any SAS games that are out there. We are continually challenging ourselves on what we can do to enhance our system bonusing applications, marketing modules, etc., We have bonusing and marketing applications that we can push out to each machine on the floor. Some of these applications act as a game within a game. For example while the player’s playing, he or she can see something else happening on the Sentinel device and realise that they have been entered into a scratch card draw, or have a chance of winning a lucky prize.”
DP: “There is interactivity [between game and system], but I don’t think the two really overlap. Sentinel adds bonusing features to drive a different experience for the players and create something that is unique.”
