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Liz Benston

Competitors, downturn dog slots leader

8 September 2008

RENO, Nevada -- If the slot machine business were like the film industry, the biggest studio with the greatest collective experience and longest string of blockbusters would be International Game Technology.

Besides offering a slew of competitive games and popular brand names, the world's largest slot maker long benefitted from competitors, who, like a group of independent filmmakers, didn't equal the volume or variety of IGT's products.

That has changed. Smaller companies, including Bally Technologies, WMS Gaming and Aristocrat Technologies, are catching up at IGT's expense.

Bally, which specialized in spinning-reel machines, branched out into video slots that allow dozens of paylines instead of the traditional, single payline across the middle. WMS, among the first to sell multi-line video slots, developed traditional-looking slots with three spinning wheels. Aristocrat, which lacked machines that accept and dispense paper tickets instead of coins, eventually had a slew of products that made inroads on IGT-dominant casino floors.

The economic downturn has exacerbated IGT's problems by putting a dent in the market for new slot machines and upgrades.

IGT, based in Reno, still has a size advantage over its competition.

Unlike the movie industry, where skillful directors, actors and writers can give a film a good shot at success, the slot business is a scattershot process of trial and error. Slot makers often have little way of knowing whether their products will be a hit until the machines are on the casino floor. Even big names with pricey licensing deals behind them, such as Elvis and Drew Carey, can fizzle with gamblers.

As a result, companies develop hundreds of slots each year. As with movie sequels, titles that have worked in the past get new bells and whistles.

But few withstand the test of time. Casinos are constantly trying new games to lure customers back to their properties. Those that don't get enough play get the boot.

That makes IGT, which sells a majority of the slots in new casinos but is less successful at selling replacement machines, a victim of its own success. But IGT also needs to sell replacements to succeed, and the casinos that bought the 510,000 or so machines now populating casino floors may see little need to replace them during the current downturn.

Casinos also have been slow to adopt so-called server-based slots. IGT has spent millions developing the technology, which, together with similar systems from other companies, is expected to revolutionize casino floors by providing huge libraries of games on demand. It will take many years for IGT, which has outspent its competitors on this front, to see a return on that investment.

Meanwhile, gamblers are dropping less into slots, making casino operators reluctant to shell out money for new technology.

In the company's third fiscal quarter, which ended June 30, revenue declined 6 percent and profit fell 21 percent compared with the same period a year earlier while expenses rose. Profit from the sale of machines was flat. Operational expenses were 30 percent of revenue during the quarter compared with 26 percent a year ago.

As part of a companywide restructuring, IGT's chief operating officer, Steve Morro, is resigning, effective Sept. 27.

After missing several earnings targets, IGT's stock hit a new low of about $20 per share last week and is down 50 percent from a year ago. Wall Street, impatient for results, is expecting layoffs.

The company's labor costs relative to the amount of revenue it is generating are too high, Deutsche Bank stock analyst Bill Lerner said. "They need to do some things that are relatively drastic."

IGT Vice President of Marketing Ed Rogich said the company views layoffs as a last resort and is exploring other cost-reduction strategies first, such as early retirement packages.

The old saying, that the person with the most toys wins in the end, is true in this business.

IGT will ultimately replace its own machines, fueling sales for years to come, and will deploy its new technology when the market is ready for it.

But Wall Street wants to see better results in the short term, especially from the team that has beaten the competition so soundly for so long.

Competitors, downturn dog slots leader is republished from