Casinos want ban on slots sharing revenue

Gary Thompson

Wednesday, Feb. 17, 1999 | 11:24 a.m.

Reports of a potential ban on revenue-participation slot machines in Nevada swept Wall Street Tuesday, sparking a drop in the prices for some game makers' stocks.

Stock of International Game Technology, the world's largest slot manufacturer, dropped 4.6 percent Tuesday, while Anchor Gaming and WMS Industries posted similar declines. Las Vegas-based Alliance Gaming plunged 18.4 percent.

The selloff continued today, with most slot makers losing further ground in early afternoon trading.

Casino executives who requested anonymity confirmed they are considering the introduction of a bill in the Nevada Legislature that would either ban or severely limit participation games, but said they haven't settled on the final wording of the proposed legislation.

The chairmen of the Assembly and Senate Taxation Committees said they haven't received any requests to draft a slot bill yet.

But securities analysts in New York, Los Angeles and Las Vegas scrambled Tuesday to get copies of a draft bill said to have been drafted already.

"The operators now intend to introduce a bill in the current session of the Nevada Legislature that will make so-called participation games unlawful," Dave Ehlers, chairman of Las Vegas Investment Advisors Inc., said Tuesday.

Critics say that if introduced and enacted, the proposed legislation could result in a dearth of creative new slot products just as entertainment supplants gambling as the No. 1 reason for tourists to visit Las Vegas.

It could also put some struggling slot manufacturers out of business and place smaller casinos, bars and restaurants at a competitive disadvantage. And it may run afoul of federal restraint-of-trade and anti-trust laws

Executives for several slot manufacturer said they couldn't comment on the proposal until they'd read its language. But they've known some legislative initiative has been in the works for months.

"I'm eager to actually see it, because I've heard about it for some time," said Alliance Gaming General Counsel Dave Johnson.

The proposed legislation is aimed at stemming the expansion of revenue-sharing slots, especially "wide-area progressive" systems such as Megabucks, Wheel of Fortune and the like.

Such so-called WAPs link together banks of machines from many different casinos, generating far larger jackpots than are available from stand-alone games.

But casino companies object to leasing the machines, rather than buying them outright, because they wind up splitting the win with slot makers. They also object to paying gaming taxes on the total win, then turning a portion of the gross proceeds over to the slot companies.

Along with Station Casinos, operators such as Harrah's Entertainment, Circus Circus Enterprises and Park Place Entertainment -- all with a large number of properties that could theoretically support their own WAPs -- have acknowledged studying the feasibility of developing proprietary games.

But two big casino companies -- MGM Grand and Mirage Resorts -- are apparently not backing the proposed legislation, analysts said today, because they believe it's an ill-conceived strategy.

While the tax issue could be resolved with a simple bill that would require slot makers to pay taxes on their share of leased games' revenue, some casino companies are considering legislation that would lead to an outright ban of participation games. And that has slot makers fuming.

"If such a bill passed," said one slot company executive who requested anonymity, "it would prove the legislature is nothing more than a rubber stamp for the big casino companies.

"It would also be an attack on smaller, weaker casino operators who can't afford to spend $10 million a year buying new slots for their floors. Yet if they don't do that, they won't be competitive."

It's that purported move toward regulating economic decisions that makes the wisdom of the casino operators' position untenable to many observers.

"They have a choice," said Bob McMonigle, vice president of sales for IGT.

"They don't have to take participation games. The reason they do is because the games are popular with customers and make a lot of money for the casinos. And if they don't put them on their floor, they'll lose business to casinos that do -- unless they can ban them and make them unavailable to the players."

A ban on revenue participation also would conflict with a business strategy casinos embrace for other suppliers.

"Take a look at the deals some casino operators have with high-end retail and restaurant operators who share revenue," one slot executive said.

"These retail and restaurant companies have spent hundreds of millions of dollars around the world developing their own brand names, and the casinos recognize the value of adding them to their properties. Yet they balk at doing the same thing with slot makers."

"It strikes us as terribly short-sighted," said Alliance Gaming's Johnson. "Participation games help defray the research and development costs of introducing new games.

"For every 30 or 40 games we develop, maybe one clicks," Johnson said. "All a ban would do is hurt the development efforts of the manufacturing industry, which would in turn hurt the casinos themselves.

"The games they don't like are participation games because they are popular with players. What the casinos are saying is, 'The games are too popular, so we'll have to ban them."'

A ban on such games could also be costly for bars, restaurants and other non-casino outlets that offer slot machines to their customers.

"A lot of those businesses operate on a revenue-sharing basis," said McMonigle.

"It doesn't make any sense for the operators to try to eliminate something that generates tremendous revenues. For example, if it wasn't for Megabucks, the slot win in Nevada would have been down for 1998. But with Megabucks, it was up.

"If somebody develops a game that makes $600 or $700 or $800 a day, the casinos ought to be tickled to death to have it," McMonigle said. "They don't pay for the machines, the royalties, the rights or the advertising, so they have nothing but a tremendous upside."

Royalties and rights are an important part of the cost of developing popular new games such as Monopoly, Wheel of Fortune and Triple Play Poker. Owners of the rights to such games demand royalties or fees that are currently paid by slot makers.

"As usual, I am somewhat skeptical of the operators' policies, views and future courses of action," Ehlers said. "Why? Their record for doing the right thing at the right time in recent years raises questions about their ability to reflect and consider the consequences of their actions.

"Specifically, I believe such an action, if successful, may be violative of federal law. I'm skeptical IGT and the stronger suppliers are going to adopt a do-nothing attitude. More than likely, they will figure out effective ways of lobbing a few hand grenades into the operators' executive suites.

"I'm also skeptical that the fundamental economic laws of supply and demand for a legal business enterprises can be overcome by statute. In short, we've noted in former times that the operators have shot themselves in their feet. I hope they don't do worse this time."