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Class II slot market poised for expansion

Mar 23, 2004 5:16 AM

(This is the second in a three-part series on Class II gaming machines.)

Slot machine manufacturers for the past couple of years have taken a "wait-and-see" attitude toward the Class II market. But the Supreme Court’s decision last month to stay out of the slot versus Class II debate virtually opened the floodgates to Class II gaming across the country.

Still, manufacturers have restrained their rhetoric, even as they scramble to position themselves in what could be a far-reaching marketplace.

"It will be a nice growth area, without question," said Marcus Prater, senior vice president of marketing for Bally Gaming and Systems, which recently purchased Sierra Design Group (SDG), one of the top Class II manufacturers in the country.

A nice growth area? Of course, Seabiscuit was a nice horse.

Moderation notwithstanding, Bally and its parent company, Alliance Gaming, are expected to reap huge rewards in the Class II gaming machine market in which SDG has already established a foothold.

In Florida, for instance, SDG provides 90 percent or about 2,400 Class II games to the Florida market. Another hot market for Class II gaming is Oklahoma, in which Bally is currently working very closely with tribal casinos.

Moreover, Bally estimates that the domestic slot market will grow by 70,000 slot machines over the next few years, driven by expansion in California, which Prater called a "wild card" because of the uncertainty surrounding current negotiations between tribes and the state.

Those negotiations include provisions to lift the current cap of 2,000 Class III slot machines per tribe, among other things. But there is no cap on Class II machines.

Thus manufacturers, at least in California, are in a win-win situation: Lift the Class III cap and sell the tribes thousands of traditional slots; or keep the cap and sell the tribes thousands of unregulated Class II machines.

Class II gaming machines, as pointed out in-depth in last week’s article, look and play like standard, Class III slot machines, but don’t fall under their more restrictive regulations.

"The pay tables are potentially identical, and the rate of return is on par with Class III machines," said Bally’s Prater, adding that pricing of Class II machines is based on revenue sharing participation, in most cases, rather than outright purchases.

"The pricing model is usually in the 70-30 and 60-40 range (the bulk of revenue to the casino), rather than the more likely 80-20 splits found in Nevada," Prater said.

In the wake of the Supreme Court’s and other appellate decisions, analysts predict a rapid expansion of the Class II market, which up until now has consisted mostly of a few tribal casinos.

"On first blush, we estimate the number of Class II machines could grow by 100,000," said J.P. Morgan analyst Harry Curtis, who added that manufacturer IGT could garner half of the market, which would net between $550 million and $730 million in incremental revenue.

For its part, IGT has been cautious in its projections, but have vowed to aggressively court the Class II market.

"We are coming to market as fast as we can with our new Reel Touch Class II bingo game," said Rollie Hill, vice president of sales for Sodak Gaming, IGT’s subsidiary charged with developing Class II/tribal gaming products.

The Reel Touch platform is not just a slot machine converted to a Class II bingo game. Instead, it was built as a Class II machine from the ground up and is capable of playing virtually all of IGT’s vast library of games.

So far, popular IGT games such as Wheel of Fortune, Cleopatra, Little Green Men, Catch a Wave and Enchanted Unicorn, to name a few, have been adapted to Class II slots.

"We are converting our entire library of game themes for use with this new Reel Touch system," said Knute Knudson, vice president of administration for Sodak Gaming.

Now that IGT is ready to toss its rhinestone-studded hat into the Class II ring, it will probably pull back from offering its popular games to other Class II manufacturers, such as SDG and Multi-Media Games, like it had in the past.

Because tribes can add Class II machines virtually at will, don’t expect to see much more sharing of intellectual property among manufacturers. The stakes are now much too high.