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Antitrust Action Could Shake Up Slot Machine Industry

16 February 2000

by David Strow

In a move that could have huge ramifications for the slot machine industry, Chicago-based WMS Industries Inc. filed an antitrust lawsuit against slot giant International Game Technology of Reno Tuesday, accusing it of using predatory tactics to hang onto its dominant market position.

Filed in Las Vegas federal court, the lawsuit came as a response to a patent infringement claim IGT filed against WMS in October 1999.

At this point, WMS is the only claimant -- though the company said that could change.

"I do believe once the substance of the lawsuit is disseminated through the industry, it will stimulate considerable interest and dialogue on the subject, both from industry peers and casino customers," said Orrin Edidin, WMS vice president and general counsel.

The lawsuit is the latest in a series of legal tangles between the companies, which have become bitter rivals. IGT remains the clear market leader in the industry, with an estimated 70 percent of the market -- but WMS has been making big strides with its video slot products, such as its hugely successful "Monopoly" series.

"It was only a matter of time before someone pursued this legal strategy, given IGT's dominance of the industry," said David Anders, gaming analyst for CS First Boston.

Anders noted that IGT's market share has fallen from around 85 percent to between 65 and 70 percent now, largely because of growing competition.

The lawsuit attacks IGT on five counts: restriction of access to slot system software protocols, entering into joint ventures "intended to restrain trade in the casino gaming industry," entering into "exclusionary market share agreements with casinos" by giving price discounts, regardless of the volume of machines purchased; filing numerous patent infringement lawsuits "despite the fact IGT knew ... that the patents were invalid;" and "tortiously interfering with WMS's existing and perspective business relations."

One specific case WMS points to is the joint venture between IGT and Anchor Gaming Inc. The joint venture between the company uses Anchor's "Spin for Cash" technology as a cornerstone of its successful "Wheel of Fortune" series. Anchor is not a defendant in WMS's claim.

"There are other arrangements, formal or not, where IGT tries to co-opt intellectual property rights of competitors to keep that technology under IGT's control," Edidin said.

"The statements set forth in their counterclaim are so clearly unfounded that they cannot go unchallenged," Sara Beth Brown, IGT general counsel, said. "IGT intends to work aggressively to respond by contesting the claims in court."

IGT has already won one key infringement battle with WMS. Last year, WMS agreed to pay IGT nearly $29 million to settle a patent lawsuit related to IGT's "Telnaes" patent -- a technology that allows huge jackpots to be offered on traditional reel slot machines.

The two are engaged in yet another patent infringement fight over the use of "touch screen" technology on slot machines -- a critical fight for WMS, given its reliance on these slots.

"IGT's been pretty aggressive trying to enforce their patents," said Jason Ader, senior managing director and gaming analyst with Bear Stearns. "They really have an obligation to enforce those patents for their shareholders. If WMS feels they were violated, they have to file this lawsuit for the good of their shareholders."

The trigger of such lawsuits, Ader said, is the slow growth rate of the slot machine business.

"There's not a whole lot of growth left in the slot machine business," Ader said. "If the industry was growing by leaps and bounds, like we see in other areas of technology ... this wouldn't be going on. Executives in boardrooms are scratching their heads, looking for growth opportunities."

No one's sure what the long-term impact of the lawsuit could be, and it will probably be years before an outcome is decided. But Bill Eadington, director of the Institute for Gambling and Commercial Gaming at the University of Nevada at Reno, said the slot machine industry has had other dominant players before -- and that these players have fallen.

Bally Gaming & Systems, for example, was the market leader 20 years ago, with a market position comparable to IGT's today, Eadington said. But when the company spread out into the casino operating business, it flagged.

Eventually, Bally filed for bankruptcy, and its businesses were spun off. Alliance Gaming Corp. now owns Bally's slot business, while Park Place Entertainment Corp. owns its former casinos.

"The marketplace can be pretty tough on companies with dominant market positions," Eadington said.

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