Skill-Based Slot Machines To Provide A Win-Win Situation For Casinos & Gaming Industry

In December 2014, the Association of Gaming Equipment Manufacturers (AGEM) proposed a bill (Senate Bill 9) that allows adding an element of skill to the slot machine games in Nevada casinos. It requires the Nevada Gaming Commission to adopt regulations relating to the development of technology in gaming, as well as to allow flexibility in payout percentages or a game’s outcome. ^[1] The passing of the bill would result in the entry of slot machines with arcade-game elements, skill-based games, and other unique features, which would require more skill and less luck. AG Burnett, chairman of the Nevada Gaming Control Board, announced his support of the bill and, after the clearance of the bill by both the Senate and Assembly Judiciary, it has finally been passed on to the Governor of the state, Brain Sandoval, on May 18, for approval. ^[2]

The bill is aimed at introducing arcade-game style gambling and video game technology in Nevada casinos. This means that if a player masters certain skills included in these games, his/her chances of winning would improve.

Changing Revenue Composition of Las Vegas Casinos

The U.S. casino industry has been witnessing the entry of new casinos in the nation over the last 5 years. However, the contribution of gaming revenues as a percentage of net profits has dipped significantly over the last two decades. In the early 90s, gaming revenues contributed close to 60% of the total casino revenues. However, the trend changed gradually, as non-gaming revenues, which include revenues from shows, food, and other attractions, has surpassed revenues from floor games and slot machines. In 2012, non-gaming revenues accounted for more than 60% of the casinos’ net revenues.

With time, these casinos and hotels have matured and evolved into a luxury segment and the non-gaming operations have become significantly important. On one hand, the food and beverage industry was booming during this period, and customers were spending more at restaurants and on food items. Vegas was turning into a hub for premium restaurants and hotels, entertainment, retail, and other shows & attractions. On the other hand, hotel rooms in these casinos started demanding higher average daily rates, making them some of the most expensive hotels in the industry.

Furthermore, revenue from slot machines has been on a declining trend since 2006, with $8.4 billion in revenues in 2006, down to $6.7 billion in 2014. ^[3] However, revenues from table games and card games have been stagnant over the same period. Growth in the gaming segments for some casino operators is a hard task now.

Source: Nevada Gaming Commission

What The Bill Has In Store For Casinos

As mentioned earlier, the trend suggests that the customers are drifting away from the slot machines. Many customers know that the chance of winning on slot machines is low. Over the last 10 years, the winning percentage of casinos on the slot machines has improved from 6% in 2006 to 6.4% in 2014.

Source: Nevada Gaming Commission

As a result, gamblers who get tired of losing money shift to other floor games. This trend has affected the casinos’ revenue stream from slot machines. If the state of Nevada passes the SB 9, we can see more skill-based games as part of the casinos’ slot machines. There are currently 45,000 slot machines on the Las Vegas Strip. However, declining revenues from slot machines indicate that the gaming segment requires some new gaming ideas on the floor to spur interest.  As a result, skill-based arcade games are expected to replace the old gaming style of gambling.

The bill is aimed at gaining the interest of the younger demographic, who is more interested in arcade-style games. The Nevada casinos have already upgraded their integrated resort offerings, including the finest dining and entertainment. For the gaming segment to keep up, the old gambling style has to be replaced or augmented. The new gaming style, which includes more skill and social elements to the slot machines, might encourage younger customers to spend more time on the slot machines. This move might, on one hand, improve customer footfall in the casinos and, on the other, increase a customer’s engaging time on a slot machine. Eventually, it might translate into better gaming revenues for the Nevada casinos.

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What’s In Store For The Gaming Industry?

The gaming industry has undergone a major change in the last 5 years, with the focus of game developers shifting towards the digital segment. On the other hand, physical sales of software titles has been decreasing, forcing game developing companies to look for new markets. The entry of arcade style gaming in the casinos can be one of those huge potential markets. Slot machine gambling in Nevada is alone a $7 billion market. Major U.S. game developers, such as Electronic Arts (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI), and Take-Two Interactive, have already entered into the small mobile arcade games market. Some of the slot machine manufacturers, such as Bally Technologies and Gamblit Gaming, have already introduced video game-like products in casinos. ^[4] Moreover, this move fits exactly into the business model of these gaming companies, i.e. to make games for the younger demographic. The more the demand for these arcade style skill-based games, the more the growth opportunities for these game developers.

The top U.S. game developing companies already have experience in making such games that cater to the younger demographic, with mobile based games, such as Plants Vs Zombies and Angry Birds. The entry of gaming companies into this market can provide incremental revenues and further boost their top-line growth. Additionally, these arcade games generally do not require much investment and R&D costs, and, as a result, they might boost the companies’ margins as well.

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Macau and Singapore Casinos generate far more revenues than Las Vegas Casinos annually. In the future, these bigger casino markets might also adopt this new gambling style. In that scenario, game developing companies will have a wider, and a far more profitable, market to tap into. However, the gaming companies might take at least six  months to develop these games, and that means even if the bill is passed by the Nevada Governor in the next two months, we won’t be able to see this new gambling style before the holiday period of 2015.

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More Trefis Research

1. Senate Bill 9, Nevada Legislature [↩]
2. AG Burnett supports Senate Bill 9, which introduces skill into slot machines [↩]
3. Nevada Gaming Commission, Statistics and reveneus [↩]
4. Next generation slot machines could play more like Super Mario, less like Wheel of Fortune [↩]