Debate on Nevada slot bill continues

Gary Thompson

Wednesday, March 31, 1999 | 10:25 a.m.

A bill that would restrict the spread of revenue-sharing slot machines in Nevada is designed to boost the profits of the state's big casino operators at the expense of equipment manufacturers, the chairman of a Las Vegas gaming supplier charged.

But a casino executive backing the bill said the growth of so-called "participation games" could undermine the profitability of operators and extend the "unfair advantage" enjoyed by the world's biggest slot maker, International Game Technology of Reno.

In a letter to key legislators, Mikohn Gaming Corp. Chairman David Thompson said the bill backed by the Nevada Resort Association "has nothing to do with protecting the integrity of the gaming industry or correcting any perceived disparity in the marketplace."

"It has everything to do with the personal interests of its sponsors," he wrote. "If passed, the NRA bill will only modestly (on a relative basis) increase the already immense revenues of its sponsors.

"It will, however, substantially decrease the revenues of its victims," the letter said. "We urge you, the in strongest possible terms, to reject this legislation in its entirety."

But Mike Sloan, a Circus Circus Enterprises Inc. executive and new chairman of the NRA, said Thompson's comments don't accurately address the intention of the legislation.

"The bill requires equipment suppliers to pay the gaming tax on the portion of the gaming revenue they receive," Sloan said. "They don't pay that now, we do.

"They want to take 20 percent of the win of a revenue-sharing game or, in the case of wide-area-progressive games, a percentage of the coin in, but want us to pay the taxes.

"Seeking to have them pay their own taxes isn't un-American. Seeking to have us pay their taxes is un-American," Sloan said.

The bill also would require slot makers offering games on a revenue-sharing basis to offer them for sale as well, Sloan said.

And it would subject manufacturers to the "same kind of licencing and regulatory criteria that apply to operators and would require gaming regulators to show the same anti-competitive and anti-monopolistic concerns they apply to us," he said.

"These guys are remarkably inventive and come up with quality equipment," Sloan said of suppliers such as Mikohn and IGT. "Nobody wants to put them out of business. We need them. We just want to stop the gouging."

Mikohn's Thompson is the latest manufacturing executive to weigh in on the acerbic debate among big casino operators and slot manufacturers over the NRA-backed bill. A particular sticking point is the revenue-sharing issue.

"While participation arrangements do not represent a large portion of our overall revenues, they are extremely important to the company because of their recurring nature," Thompson wrote.

"We need sources of recurring revenue to help us through periods of weak sales. In 1998, we were not profitable. We hope to turn that around in 1999."

Las Vegas-based Mikohn expects to record $125 million in revenue this year, Thompson said, though only 5 percent will come from participation games in which host casinos get 80 percent of the win and the slot makers 20 percent.

While revenue-sharing games account for only 5 percent of the slots on casino floors, equipment suppliers are becoming increasingly reliant on recurring revenue streams to offset profit slumps caused by slower machine sales and fewer new casino openings.

"We have invested many millions of dollars in the last five years developing this source of recurring revenues," Thompson said. "It is worth noting that our proprietary games, even after our participation share is paid, universally generate revenues to casino operators far in excess of the revenues generated per device by non-proprietary games."

But Sloan said the slot makers are pushing revenue-sharing games to the exclusion of others, a practice that eventually could "undermine the stability of the casino operators who build the buildings and employ the employees."

"There is a machine that one manufacturer currently sells for around $10,000," Sloan said. "They've informed casino operators that as of July 1, that machine will be available only on an 80-20 participation basis.

"And over three years, that 20 percent will wind up costing a casino $100,000 for each machine. That's money that is coming out of the money we use to pay for the buildings and for our employees."

Sloan said the investment community is also pushing slot makers to demand revenue-sharing deals.

"Wall Street says to Mikohn or IGT to get recurring revenue, but it's at somebody else's expense," he said.

"There's not a casino-operating company in the state that has anywhere near the economic success IGT has had. They've got a smaller capital expense and a smaller workforce that helps them report 35 percent pre-tax earnings margins year after year."

Thompson argued that the bill is an attempt to artificially control the free market.

"Stripped of all euphemisms, the NRA bill seeks to impose price controls on proprietary products developed by slot makers," he said. "The proprietary nature of these products, consisting of trademarks, patents and copyrights, is property protected by the U.S. and Nevada Constitutions."

"There are people who make automobiles or televisions who have patents and trademarks who don't get paid a percentage of someone's gross revenue," Sloan said. "When you buy a car, you don't pay 20 percent of the money you earn to the carmaker for the rest of its life just because somebody has a patent on some of the parts.

"And this isn't a free-enterprise deal. This is the gaming industry," he said.

Thompson, though, called the proposed legislation "confiscatory."

"It strips private property rights from one citizen and gives those rights to another for no apparent purpose other than to enhance the wealth of the second citizen at the expense of the first. No public purpose whatsoever is served by this legislation."

"That makes me wonder whether Dave has actually read the bill," Sloan said. "The bill says that if you have a wide-area-progressive game that's offered on a revenue-sharing basis, you also have to offer it for sale.

"The bill doesn't set the price. You can demand any price you want. If you want to charge $2 million for a machine, you can do it. And if you can get that price, good for you.

"But with revenue sharing, the tab never stops running. You're paying for a game in perpetuity."

Thompson said the bill's enactment would have a "serious" economic impact on Mikohn, diminish its incentive to develop new products and "cause us to reduce our emphasis on the Nevada market and redirect those efforts to more promising markets elsewhere."

Thompson also asserted that the bill implies "that its multi-billion dollar casino sponsors are incapable of negotiating profitable contracts for the use of gaming equipment without legislative help."

"Although they have been entering into such contracts and doing quite well for themselves for many years, they have recently come to the realization that there may be even more money to be made if they can enlist the aid of the Legislature to restrict the profits which can be earned by the gaming-equipment manufacturers," he said.

"This is a first for Nevada and would set a dangerous precedent," he said.

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