Slot machines are no longer just one-armed bandits. The machines now talk to customers, display 3-D graphics and enable gamblers to interact with each other and spend money in a way similar to what the Internet offers. While some changes can already be seen on certain slot machines today, the future will bring a whole new world to the casino floor -- and potentially to casino operators' bottom lines. Several years ago, casinos began replacing the old coin-operated slot machines with ones that use paper tickets for payouts. The transformation helped casinos increase profits by cutting down on employee coin refills and allowing consumers to gamble faster by not having to scoop up buckets of quarters. Today, nearly all casinos have "ticket-in, ticket-out" slot machines, with International Gaming Technology ( IGT) having been the leader in developing the technology. Now IGT is a major innovator in the next step for casinos: server-based gaming. "Ticket-in, ticket-out was just scratching the service with what server-based gaming will allow these guys to do," says Joe Fath, an analyst with T. Rowe Price, IGT's largest shareholder. Server-based gaming will bring a host of download and configuration capabilities to slot machines. The technology will allow casino owners to use a computer to connect all the machines on its casino floor and tailor each to players' preferences.
Players will be able to play the games they want at any location without having to switch machines. No more waiting around for your game of choice. Casino owners will be able to maximize revenue by changing their slot options on a game floor at any given time, without having to physically move the machines. Owners also could use the new technology to market comedy shows and other non-gaming offerings to players who are sitting at machines. The excitement about server-based gaming has have been picking up lately in advance of the annual Global Gaming Expo, or G2E, held in Las Vegas in November. There, IGT will give updates on the technology and show off hot new game titles. IGT and other major gaming equipment suppliers such as WMS Industries ( WMS) and Bally Technologies ( BYI) have seen their stocks rally in recent months, and analysts expect the trend to continue into G2E. "That subsector will get the most attention in the next few months" (among casino stocks), says Fath. Slot machines are the most profitable gaming areas for U.S. casinos. Server-based technology likely will create additional revenue and cost synergies for casino operators, Fath says. For gamblers, the implementation will radically change the casino floor. The transformation for a slots player is similar to the "changeover he is seeing in his living room," says Ed Rogich, vice president of marketing with IGT.
Flat screens, improved graphics and high-definition sound are already coming to slot machines. And clunky boxes are being replaced by sleeker machines on the casino floor, similar to how mammoth televisions are being replaced by flat-paneled devices. "You'll see the emergence of computer technology and advancements in graphics ultimately coming to the player in the form of new
gaming options," Rogich says. He compares the new machines to Amazon.com ( AMZN), with its customer focus and personalized services. Future slot machines will be tailored to individual customer needs as tracked by the gambler's players card. There are, however, questions about how much casinos will be willing to spend on the technology. As with any product, demand will end up being a function of price. This is particularly true in the casino industry today, where LBO firms are buying major casino owners Harrah's ( HET) and Station Casinos ( STN) and saddling them up with debt. That has raised fears that these operators won't be in a position to spend on all this fancy new equipment. Some equipment executives admit this is an issue. But so long as the products add value to the operator or consumers, then they should be successful, says Larry Pacey, senior vice president of product development with equipment maker WMS Industries.
"People have not really successfully communicated why you would want server-based," Pacey says. "This year
at the G2E conference , they will get a better sense." At the conference this year, IGT plans to debut its server-based director software in operation on the G2E exhibit floor. Last year, IGT just demonstrated the concept. WMS, meanwhile, plans to unveil a fourth prong of its long-term technology platform, though what that will be is a secret. The past three prongs focused on network gaming, which allowed for multiplayer gaming; a 3-D platform; and "transmissive reels," which add LCD displays to mechanical slot machine reels to create more payout options. There are other obstacles besides the pricing issues. Casino regulators have yet to approve some of the more advanced technology. As well, elderly customers -- the cash cows of the casino industry -- will need to be trained into thinking that a high-tech slot machine is really better than the old one-armed bandit. "We don't see server-based gaming being meaningful for at least another year or so," says Pacey, the product development executive at WMS. If the equipment makers can hurdle the obstacles, then profit opportunities abound. Analysts predict casino operators could eventually spend millions replacing their current technology with server-based products starting in 2009. "I perceive that this has the opportunity to be a paradigm change with an impact in the industry larger than paper-in, paper-out (a.k.a. ticket-in, ticket-out)," says Steven Rittvo, chairman of The Innovation Group, a consulting firm that works with the gaming industry. "This has the possibility of impacting capital costs to casinos in the long-term."