Analyst predicts Russia as world’s next gaming hotbed

By Liz Benston (contact)

Monday, Feb. 7, 2005 | 10:50 a.m.

Governments in the Chinese province of Macau and Singapore have lately grabbed much of the attention of those focusing on the sweetest overseas casino markets.

The attention makes sense, with their proximity to hundreds of millions of increasingly wealthy people with a yen for gambling.

But one analyst is betting that Russia -- the world's second-largest country by population with an all-cash culture that favors spending over saving -- may soon rival Asia as one of the world's fastest-growing gambling markets.

"We believe Russia will be one of the most dynamic gaming markets over the next three years," Deutsche Bank Securities analyst Marc Falcone wrote in a report issued to investors last month.

Russia is considered a wide-open market with no dominant competitors but little regulation. A Wild West reputation for organized crime as well as petty theft has kept some U.S. operators from making major inroads into Russia, with worry about potentially risking lucrative gaming licenses in Nevada and other states an oft-cited reason.

In his report, Falcone -- who traveled to Russia in December to meet with casino and slot operators -- said the country is "ripe for expansion" given residents' propensity to gamble, a desire to spend money on luxuries and relatively few gambling outlets, among other factors.

Falcone said he expects the number of slot machines operating in Russia to expand from about 240,000 slots to about half a million of the devices. Gaming revenue is expected to climb from about $2.4 billion in 2004 to roughly $9 billion by 2007.

The unregulated environment in Russia has spawned a significant increase in slot locations in recent years, with machines popping up in neighborhood groceries and convenience stores --like Las Vegas.

The United States' largest slot makers -- International Game Technology, Alliance Gaming Corp., WMS Industries Inc. and Aristocrat Leisure Ltd. -- already sell slot machines in Russia. The companies have struck deals with local companies to distribute slots.

Reno-based IGT, the world's largest slot maker, has opened a sales office in Moscow and has plans to sell an estimated 15,000 to 20,000 machines over the next three to five years, the report said.

Alliance Gaming of Las Vegas has been in Russia since 2001 and last year achieved an estimated 6 percent market share in slots. WMS, based in the Chicago area, had about a 5 percent share last year, or 2,000 games, but could double that in the coming years, it said.

Australian slot giant Aristocrat Leisure, which operates in the United States as Aristocrat Technologies Inc., exited Russia in the late 1990s but has re-entered the market in the last three years. The company, which specializes in multi-line video slots of the type already played in Russia, could increase slot shipments by 20 percent a year over the next three years.

Much of the new business will likely come from outlying areas with fewer slot locations rather than from Moscow and St. Petersburg, Russia's biggest cities, the report said.

The Russian government is debating gaming laws that could be passed and approved by President Vladimir Putin this year, Falcone said.

Legislation that could limit the number of gambling licenses and establish minimal capital requirements could slow the rate of expansion, though it's "too early to tell" what form the final version might take if passed, he said.

With no testing laboratories or agencies for gambling games, little government oversight, and a very low tax rate, Russia is a world away from the model used to regulate commercial casinos in the United States.

Investors should be warned, Falcone said.

Illegally reproduced slot machines are a common sight and legitimate slot makers are largely unprotected because of "ineffective equipment certification," he said.

As a result, casino operators are able to purchase copies of current titles for a fraction of the price.

"With low licensing costs and little capital requirements, slot operations can crop up overnight," Falcone said.

While this situation is beginning to change, newcomers face significant challenges, he said.

"Until such time as a regulatory and oversight framework is in place and is enforced (and less than reputable operators are forced out of the market), legitimate manufacturers will face an uphill climb, no doubt missing out on sales of even greater numbers than currently anticipated."