Vegas Special I: Anchor Gaming Revives Slot Business

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LAS VEGAS -- "Wheel -- Of -- Fortune!"

Even in the jangling noise of the casino that sits beneath the sleek glass pyramid of the

Luxor

hotel, the three words stand out. As a dozen or so gawkers look up, the brightly lit wheel starts spinning.

Chuk-a-chuk-a-chuk.

The wheel, attached to a slot machine, slows to a stop on the 100 coin payout line. Even as it does, a nearby slot machine issues its own siren song.

"Wheel -- Of -- Fortune!"

Welcome to the new era in slot machines.

For a century, slots haven't changed much. Even though they're now controlled by computer chips instead of mechanical reels, most one-armed bandits still look pretty much the same as they did decades ago. Check out any big casino, and you'll see row upon row of identical "Red-White-and-Blue" and "Double Diamond" machines.

But in the last six months, a new generation of slots has begun to invade casino floors. These are slots that play games-within-games, slots with television screens atop their reels, even slots that don't have reels at all, just high-resolution computer screens capable of playing movie-quality graphics.

And the trend is only accelerating. The biggest success story in the casino industry this year is

Anchor Gaming

(SLOT)

, which has become a billion-dollar company thanks to the success of its

Wheel of Gold

and

Wheel of Fortune

games. (Designed by Anchor, Wheel of Fortune is a 50/50 joint venture between Anchor and

IGT

(IGT) - Get Report

, the world's largest slot maker.)

Anchor made 60 cents in its September quarter last year. This year, it's already said analysts' estimates of 97 cents for the quarter are conservative. That growth has taken the company's stock from 25 to 80 in five months.

The popularity of Anchor's slots stems from a deceptively simple gimmick, the "game-within-a-game." Here's how it works: Hit a certain symbol on the basic slot machine, and a bonus game on top of the machine -- a roulette-style wheel or a pinball machine -- lights up, paying a bonus that can range from 25 to 1000 coins. Of course, the "bonus" is actually designed into the game; like all slots, Anchor's games pay out fewer coins than players put in.

* * *

In the staid world of slot machines, the game-within-a-game has been a huge success. On average, a regular slot machine on the Las Vegas wins about $90 per day; Anchor's games win as much as three times that. On a typical casino floor in Las Vegas, where one-fifth to one-third of the slots are typically in use at any one time, players line up two deep to play Wheel of Fortune.

"What we've seen over the last 18 months is that consumers are responding to machines that provide more entertainment than their predecessors," says David McDonald, an analyst at

Montgomery Securities

who follows the casino industry.

Players echo that sentiment.

"You notice every time the wheel spins," says Carry Scholl, a vacationer from Chicago who was playing a Wheel of Gold on a recent Saturday afternoon at the Flamingo Hilton.

Even more sophisticated gamblers sometimes fall for the games. "They're gimmicks. I know it's the wrong thing to play and yet I'm playing," says Annette Herz, a Las Vegas local playing a Wheel of Fortune at the Flamingo. Herz says she rarely played slots but was walking through the casino to meet her husband when the wheels caught her attention.

That's no accident. Behind the flashing lights and noise of the wheels are some very interesting psychological tricks. Anchor has engineered the games to hit the bonus symbol approximately once every 60 to 70 plays. With a bank of 10 Wheel of Fortunes in a row, and each bettor playing the game about once every ten seconds, one of the wheels is likely to be spinning about once each minute. That's often enough to give people watching a bank of games the impression that the players are hitting the bonus round very regularly.

Anchor has also designed the games so that the bonus symbol only pays off if the player has bet the maximum number of coins or tokens that the machine accepts. The result: Anchor's games are extremely "tight" if they're played with less than the maximum number of coins, sometimes paying players 85% or less of the coins they wage. But bet the max, and the game suddenly loosens up, paying off at well over 90%. That design essentially forces players to bet the maximum each time.

And the company is steadily ratcheting up that maximum. Its newer games force bettors to wager six, seven or even eight coins at once, and Anchor game designer Randy Adams is working on games that push the coin-per-machine limit even higher, forcing players to play 20 or 25 coins at once to have a shot at the bonus.

Another difference between Anchor's machines and regular slots: The company's newest games don't offer a clear explanation of which combinations pay off. Adams says he doesn't want players thinking about his games, just playing the most coins they can and waiting to hit the bonus round.

* * *

With bushy blond hair framing his tan face, Adams looks like the kind of guy you'd expect to design slot machines, half mad scientist and half surfer. If he's concerned about the ugly side of gambling or the fact that his games encourage people to bet more quickly than they otherwise might, his worries don't show.

Adams, the designer of Anchor Gaming's killer slot machine, is "worth a billion dollars in market cap," says one analyst. And as Adams offers a visitor a tour of Anchor's low-rent headquarters, in an office park just south of Las Vegas' McCarran Airport, it's easy to see why. The designer's profane enthusiasm about Anchor's prospects creates the impression that he and the company are unstoppable.

"They have great design people and creative people," says

Deutsche Morgan Grenfell

analyst James Murren, who rates Anchor a buy. "I think there's still more momentum in Anchor."