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Analyst: Red Tape Entangles Gaming Companies

9 January 2003

by Rod Smith

NEW YORK --The No. 1 issue facing the gaming industry today is regulatory red tape, Deutsche Bank Securities analyst Marc Falcone said Wednesday.

The problems are particularly severe on the manufacturing side of the industry where the processes for approving new technology is most cumbersome, he told industry insiders attending the Slot Manager Institute at the Rio. The institute is held in conjunction with the American Gaming Summit, which begins today.

"There needs to be a higher comfort level for investors long-term as well as for regulators. The approval process needs to be speeded up to bring new products on the market and, in turn, to achieve stronger growth prospects for the industry than we have today," Falcone said.

Besides accelerating the regulatory process, he said the stability of the tax structure is very important.

"Tax stability like in Nevada is key to keeping the gaming industry a viable investment opportunity," Falcone said.

Illinois, with the highest and most recently increased taxes, has $40 million in capital expansions under way compared with Nevada, which has the lowest taxes and no recent tax increases, and where $3.9 billion in investments are being made.

Tax policy, he said, is a key variable in explaining the difference between the states.

"Wall Street also underestimates the importance of the (slot machine) replacement cycle," Falcone said.

Until recently, the cycle for replacing slot machines lasted seven years to 10 years, he said, but it is quickly approaching four years to five years.

"The real question is how quickly the industry can move new technology in," Falcone said.

Research and development is yielding new technologies such as cashless slot machines that are disruptive but are driving the industry, he said.

"I can't emphasize how critical R&D spending is to the development of the industry," Falcone said.

And, in turn, "technology is the backbone of growth. It's going to be critical in how customers adapt to the gaming industry and should enhance revenues. It also is helping companies realize labor savings of more than 30 percent and increased efficiencies," he said.

The dynamics of the regulatory approval, the technology development and the slot machine replacement cycles make slot machines "one of the really key drivers for both consumers and investors in the gaming industry today," Falcone said.

However, because of problems in the regulatory process in particular, "the outlook for the industry is cloudy right now," he said.

Today, there are 700,000 slot machines in use in North America. Falcone said the big question is whether the industry can reach 800,000, which he predicted it would by 2010.

"New technologies are helping companies achieve top line growth and focus on cost controls," he said.

The key to hitting that target and to the future of the industry, he said, will be managing the profitability of the industry.

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