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[email protected] Paradise and IGT: Taking It on the Road G reat entrepreneurs have a knack for spotting opportunity in crisis, and Macau’s ever- inventive Jay Chun believes he’s spotted one in the US. The co-distribution deal he struck with IGT last month has presented his Hong Kong- listed Paradise Entertainment with its first real crack at the largest of the world’s gaming markets—a market with troubling systemic issues, an overwhelmingly slots-centric market saddled in the aftermath of the recession with too many casinos chasing an aging and dwindling patron base and in need of something new and dynamic to attract new, younger players. Whether this can be addressed by turning very big slot manufacturers into even bigger manufacturers remains to be seen, but certainly that’s what’s driving the M&A that’s reshaping the competitive landscape, some $16 billion worth over the last 18 months, and this Paradise-IGT deal may turn out to be one of its more interesting subplots. Mr Chun is the brains behind LT Game, the Paradise subsidiary whose electronic baccarat has taken Macau’s booming mass market by storm, answering shortages government policy has engendered in table games and dealers with a system that allows a single croupier to turn cards for scores of players simultaneously via individually linked betting stations. Macau’s casinos have installed 3,239 of these stations to date, and it’s expected that thousands more will be deployed as more resorts open on Cotai and those table and labor shortages become more acute. There hasn’t been much interest in this technology in the US. But there will be. Because the industry there is having to confront a giant paradox: that of the largest slots market in the world— some 900,000 devices, a $45 billion industry—where slots, as we know them, aren’t cutting it anymore. No one is more aware of this than IGT, which dominated that market for 20 years and now cannot generate shareholder value sufficient to justify its existence as an independent company. US commercial and tribal casinos combined produced $66.3 billion in gaming revenue last year, which was a record, but it was only 1.6% better than 2012, despite the fact that six states opened new casinos or expanded their offerings. Of the states that saw no significant expansion, only Nevada—i.e. the Las Vegas Strip—and New York saw year-on-year revenue growth. Same- store results last year were down 3.1% nationwide. Since the worst of the recession in 2008-09, five new states have added casinos, five have added racetrack slots and more than 20 new tribal venues have opened, and over this time, gaming revenue has grown an average of 1.46% a year. And it’s going to get worse. Moody’s Investors Service forecasts revenue will actually decline and by 3 to 5% over the next couple of years. The fact that Americans aren’t gambling in the numbers needed to support the growth in supply has a lot to do with the downsized and uncertain future that is the new reality post- recession for many in the consumer class. So it’s not helping that casinos also find themselves sliding down the wrong side of the demographics curve. “We have seen flat-to-down trends in slot win across both the Las Vegas Strip and throughout the U.S.,” noted Union Gaming Research in a July report on GTECH’s $6.4 billion acquisition of IGT. “With a younger mix of players coming into casinos, a key concern for the equipment industry is that slots generally appeal to an older, more risk-averse gaming customer.” This is less of a concern in Las Vegas, which is a huge non-gaming draw and has been successful in recent years in attracting high-stakes international table play, mostly out of China, to float the gaming side. But the Strip is less than 20% of the US market. In the other 80-plus percent slots are the lifeblood, the source of 85% of gaming revenue, and these guys are hawking a 20th century entertainment proposition to a lot of 20th century customers who are going the way of all flesh. Southern California-based Eilers Research expects North America’s installed base of slot machines to increase only about 1.2% over the next eight years. Table games, on the other hand, while less profitable overall, have been holding their own with revenue increases in the mid-single digits that look positively robust by comparison. And they do attract those elusive younger players. This makes LT Game’s technology potentially a compelling sell and dovetails nicely both with Mr Chun’s desire to expand his global reach and GTECH-IGT’s need to counter competing platforms from the likes of SHFL Entertainment, now part of the Scientific Games-Bally Technologies conglomerate, and you can bet there will be others. In Macau, Mr Chun has been able to claim an exclusive patent and hasn’t had to compete. He won’t have that protection in the United States. It’ll be an interesting experience for him and for IGT, which has LT’s US distribution rights. For the rest of us it’s going to be interesting to watch.