Across the globe, reports of diminishing revenue for major land-based casinos have caused nail biting among operators and government treasurers. From new restrictions on pokies in Australia, to the closure of 4 (soon to be 5) of Atlantic City, New Jersey’s 12 casinos this year alone, it’s clear that the gambling industry is taking an economic dive. And with it, slot machine makers are finding that their warehouses have more machines than shelf space.
Economic windfalls always have a trickle effect, and this one is no different. Thousands upon thousands of casino workers found themselves walking the unemployment line this year, just as establishments locked their doors or shuttered various areas of the gaming floor to save money. Slot machine makers are feeling the crunch as well, finding the demand for new gambling devices has fallen far below status quo.
It was a topic of heavy discussion at the G2E Global Gaming Expo in October, and one that investors at Wells Fargo shed some moderately positive light on. Dennis Farrell Jr., leader of the Wells Fargo team at G2E, said, “We believe the gaming technology sector is attractively priced as a subsector on a yield basis and expect free cash flow generation and recurring revenue streams to offset near-term industry challenges.”
The investment bank is anticipating a drop of 35.2% in slot machine and table game sales across the US this year alone, and another 10.4% decrease in 2015. An additional 1.9% decline in replacement sales is projected for next year “as industry demand stabilizes at around 46,000 replacement units.” But Wells Fargo believes those figures will rise back into the positive realm the following year.
“We expect 2015 to mark the bottom in product sales as 2016/2017 should show improved growth with Maryland, Massachusetts, New York, Pennsylvania and Macau [opening] new gaming offerings,” said Farrell Jr.
It seems consolidation is the name of the game for now. A number of major buyouts are already taking place. In October, Australia’s slot machine giant Aristocrat Leisure purchased US-based slot machine maker VGT for $1.28 billion. Last month, US-based lottery equipment and management firm Scientific Games completed the acquisition of global slot machine maker Bally Technologies Inc. for $5.1 billion. Another deal expected to close in mid-2015 will see Italian lottery equipment brand GTech absorb major slot machine maker, IGT for $6.4 billion.
Wells Fargo said the slot machine industry’s weak results, combined with the recent growth of the lottery technology segment” has been a strong channel for consolidation.
In a report published on Wednesday, Wells Fargo said these mergers will help reduce the bottom line for companies by reducing labor costs and synergizing revenues. “Cross-selling and mobile expansion” were also considered highlights for future growth.
“The online and mobile lottery market is a strong, long-term opportunity for the industry,” leading into another topic of potential growth for lottery equipment and slot machine manufacturers. Wells Fargo said that interactive gaming via mobile and online, including both real money gambling and social gaming opportunities, presents “compelling growth opportunities”.
On the opposite end of the spectrum, Wells Fargo warned that, “barriers to entry are quite low and technology content could be short-lived.” Essentially, the market is still new and there are many competitors looking to tap into the market. Much of the content will see transitory appeal among consumers and could result in many more acquisitions of smaller brands, this time in the online/mobile gambling and social gaming sector.