Casinos, manufacturers may split over percentage issue

Robert Macy

Thursday, Feb. 18, 1999 | 9:04 a.m.

LAS VEGAS - Nevada casinos, stung by growing competition from other markets and supply concerns in Las Vegas, may be facing a split with the manufacturers who provide the games people play.

Rumors of pending problems have impacted stock prices of gambling equipment manufacturers such as International Game Technology, which controls more than 75 percent of the U.S. slot market.

"We've been hearing rumblings about this for the past several days," said Jason Ader, senior managing director for Bear, Stearns & Co. Inc.

The subject was first raised earlier this year by J. Terrence Lanni, chairman of MGM Grand Inc. Speaking at the Las Vegas Preview, a business outlook seminar, Lanni raised concerns about gambling equipment manufacturers and slot route operators, saying they do not pay gambling taxes as gaming licensees do.

"I think you're seeing casino companies facing increased competition from new jurisdictions and from California," said Kevin Jacobs, an analyst for PricewaterhouseCoopers Securities. "The companies are on the defense because of all the supply being added to Las Vegas over the next couple of years."

Four new resorts are scheduled to open in Las Vegas by the spring of 2000, coming at a time when the visitor count is stagnant.

At issue is the practice of gambling manufacturers such as IGT, Anchor Gaming and Alliance Gaming marketing their slot and video poker machines to casinos on a participation basis, rather than a straight sale. Under such a plan, the manufacturer receives a percentage of the machine's revenues.

"There are a growing number of people in the industry who have expressed concern about IGT moving more of their pricing away from a sale to a lease in perpetuity," said one casino executive who requested anonymity. The executive said some of the agreements now call for 15 or 20 percent of the machine revenues as long as the machine is in the casino.

There has been talk in the industry of pursuing legislation that would ban participation arrangements.

IGT officials contend the legislation is misguided.

IGT has more than 100,000 machines throughout Nevada and only 4 to 5 percent are on a participation basis, according to Ray Pike, the company's executive vice president.

He said the participation pricing helps cover increased costs in research and development, which now runs $40 million to $50 million annually.

"If the pricing is not done through participation, you'll be looking at more expensive leases," Pike said.

Some hotel officials have complained they are spending hundreds of millions of dollars on new resorts, yet are paying more to manufacturers under participation agreements.

"We understand the casinos' concerns about their investment in bricks and mortar," Pike said. "We're trying to help them succeed every way we can."