Vegas Special III: Silicon Gaming Faces Uncertain Future

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LAS VEGAS -- If Anchor Gaming (SLOT) is the used-car salesman of the slot business, a company that's getting rich by finding new ways to spiff up old iron, Silicon Gaming (SGIC) is a struggling Saab dealer, with cool (and expensive) new machines that just won't move off the lots.

The waiting room of Anchor's headquarters is loaded with the company's slot machines; Silicon's Las Vegas marketing office holds fresh copies of

The Wall Street Journal

and

Fortune

. Silicon isn't even based here in Sin City. Reflecting its high-tech roots, the company is headquartered in Palo Alto, Calif.

Silicon's machine, a glossy metal box with a 26-inch high screen, is distinctive too. Called the Odyssey, the Pentium-powered machine is designed to compete with traditional one-armed bandits by offering a variety of computerized games, from video poker to keno to simulated slots. Players can choose to play one of six games by touching the screen.

With their movie-quality graphics and three-dimensional animation, the Odyssey's games are undoubtedly pretty, and Silicon's technology has earned the company some backers on Wall Street.

"Silicon Gaming just symbolizes what is becoming right about the industry," says analyst James Murren of

Deutsche Morgan Grenfell

, a lead underwriter for Silicon's 1996 offering. "Their game set currently is very exciting. It's very popular where it's being played."

Maybe. But an unscientific sampling of some of Las Vegas' biggest casinos doesn't bear Murren's observation out.

Most of the big casinos in Las Vegas have at least a few Odysseys spread across their cavernous floors. But the games don't appear to attract especially heavy play. At

Sunset Station

, a new $300 million casino several miles east of the Las Vegas Strip in Henderson, a bank of Odyssey games was mostly empty on a recent Friday afternoon. The story was the same Saturday night on the Strip at the packed

New York-New York

hotel, where a bank of 12 Odysseys was more than half-empty.

And in the

Luxor

and

Excalibur

, the second- and third-largest hotels in Las Vegas, the Odyssey is nowhere to be found.

Circus Circus

(CIR) - Get Report

, which owns the properties and has more casino space on the Strip than anyone else, gave Silicon's machines the boot after a short trial.

Circus declined repeated requests to discuss its decision, but Silicon chief financial officer Tom Carlson says Circus rejected the Odyssey because of "a pricing issue," not weak play. Carlson says Silicon's games routinely get double the play of the average slot on the Las Vegas Strip, although he refuses to offer specific numbers for win-per-day.

And Silicon is about to face some new competition. Bally Gaming, a subsidiary of Alliance Gaming

(ALLY) - Get Report

, announced plans last week to introduce its own Pentium-based 3-D machine. Julie Mottes, a spokeswoman for Alliance, says Bally's new "Game Magic" platform will have a library of 10 games, including blackjack, roulette, video poker and a new "Loony Darts" game.

Carlson says Bally's new machine doesn't worry him, pointing out that Game Magic has several months of regulatory tests ahead before it can enter casino floors.

"The PC architecture isn't something we're trying to protect," Silicon marketing director Jeff Wong says. "Our barrier to entry is hopefully that we will be the very high-end, quality producer." At the company's California headquarters, teams of directors and artists are working to build games based on sports, mysteries, and game shows, he says.

But all that overhead doesn't come cheap, and Silicon is burning cash fast. The company, which raised $37 million in cash in last year's initial public offering, had just $16 million in cash and short-term securities at the end of June, down from $35 million at the end of December 1996. Silicon lost $5.9 million, or 54 cents per share, in the second quarter, on revenues of $1.6 million.

Carlson says the company plans to return to the capital markets for an infusion of $25 million to $30 million before the end of 1997. He attributes the need for the secondary offering to Silicon's decision to lease some of its games to casinos, foregoing upfront revenue in favor of a recurring stream of income.

Valuing Silicon is difficult, since analysts don't expect the company to turn profitable until 1999 at the earliest. For this year, it's expected to lose $1.96 per share; next year, it's expected to lose another 12 cents, and estimates for both losses have recently increased.

In the end, Silicon won't succeed unless it can create compelling new games, says

Jefferies & Co.

analyst Rob Curran. He notes that the most popular game now on the Odyssey is Phantom Belle, a version of video poker. That alone won't convince casino operators to buy Odysseys, he says.

"I think it's a really nice product. I think it's a little early to tell exactly how much impact it could have," Curran says.