No Game-Changer For Gaming Manufacturers

 |  Includes: BYI, IGT, WMS-OLD
by: Morningstar

By Vishnu Lekraj

There are two major objectives for a gaming manufacturer: Build a gaming machine to grab the attention of a gambler and get them to play, and keep the player at the gaming machine as long as possible.

At this year's Global Gaming Expo (G2E), we were able to see how the three major U.S. slot machine makers will try to execute the above two objectives. WMS Industries (NYSE:WMS-OLD), Bally Technologies (NYSE:BYI), and International Gaming Technologies (NYSE:IGT) rolled out many new gaming titles, gaming themes, and machine aesthetics at G2E in an effort to push as many units as possible out to gaming operators. With a slowing replacement cycle and moderate new casino floor-space growth, the importance of operational execution, including the optimal development, manufacturing, and selling of gaming machines, has increased immensely for the industry.

Novel Controllers Headlined Hardware Developments
The gaming machines that were on display from the three major gaming manufacturers at the 2011 G2E conference showed several attempts at building in greater player engagement and ultimately yield per machine. Perhaps the most noticeable were additions to the way a player uses a gaming machine's controls. This dynamic was best demonstrated by IGT, which released a joystick controller for some of its machines. The joystick allows the player to move an object around on the screen very easily and mimics the older arcade video game machines of decades past. The game that best demonstrated the effectiveness of IGT's joystick controller was "Centipede." This game's bonus round is the actual vintage video arcade Centipede game from Atari, which adds an element of nostalgia and novelty to the box for certain demographics. More importantly, the controller adds an element of connectivity and control over the game, which allows the player to believe that chance alone will not dictate if they win or lose.

Customizable Games Headlined Software Developments
Keeping a player engaged and at their seat is not only an objective of pleasing hardware, but more importantly, the gameplay or math of a game. Gaming innovation and math has been a hallmark of the three major gaming manufacturers and is one way machines from WMS, Bally's, and IGT yield more than most others. At this year's G2E, we saw a plethora of innovative games from multiple play lines to payouts that depend on the outcome of choices made previously by the player. The common theme that ran throughout the showcased software developments at G2E was greater player game customization.

The ability to build customized aspects into a particular game is a dynamic we believe could help drive greater player engagement and ultimately yield, if executed properly. Allowing a player to control the volatility, or the payout profile of a machine, is a variable that was highlighted by the major gaming suppliers. In many new games, the player has the opportunity to choose between more wins per play at a lower payout ratio or less wins per play at a higher payout ratio. This customization will allow a particular game and its math to appeal to a wider swath of gambling patrons. It will also keep many players in their seats for longer durations, as they are psychologically more drawn into the game either through winning more often or knowing they could win a large payout, in our opinion.

Despite Impressive Gaming Innovation, Gaming Machine Demand Will Remain Lackluster
Even with the plethora of cabinet innovations, themes, and gameplay developments the gaming machine manufacturers have rolled out over the past several years, demand for their products has remained at a subpar level. The stagnant growth in discretionary consumer spending, the changing composition of casino revenue streams, and the high leverage of many gaming operators may leave the industry fighting over very little in terms of industrywide growth. Accordingly, the ability to produce a high yielding lineup of products will be even more critical than ever for the gaming manufacturers. While we were impressed with different aspects of each major player's product exhibitions, we saw no game-changer that could give one an extra leg up over the others.

Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.