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Issue Date: Vol. 50, No. 11, November 2010, Posted On: 12/14/2010


Three Myths, Two Cycles And...A Surprisingly Hopeful Future


by Frank Sensinsky
amusement business, coin-op games, amusement industry trends, entertainment trends, arcade industry forecast, coin machine route, arcade game, vending route, vending business, Frank Seninsky, Alpha-Omega Amusements, coin machine repairs, coin machine service, arcade game service, Amusement Entertainment Management, game parts, video game, pinball machine, jukebox, redemption games, family entertainment centers, FEC

The industry is actually transforming itself in even deeper and longer-lasting ways. For example, we continue to see slow-motion generational changeover as many operators in their late 50s, 60s, and even 70s -- the industry's leaders for the past 30 years -- look toward retirement.

Meanwhile, we also see accelerating changes in technology and consumer behavior as smartphones become the new toy and "thumb culture" takes over pop culture. "Thumb culture" is what the Japanese named texting 10 years ago when their teenagers spent all their time sending each other text messages, typing with their thumbs on tiny cellphone keypads.

Now American kids are doing it. (My nephew sends 8,000 texts per month.) A growing number of our amusement game customers are too busy texting to play games when they enter many of our locations.

In a time of so much flux on so many levels, myths and disinformation flourish. Dozens of myths are leading operators astray these days, but here is a quick recap of the top three...the biggest and most dangerous myths that have gained currency among operators...and an explanation of why they're wrong.

(Interestingly, all of these myths are pessimistic. Often, the truth is more encouraging than industry members seem ready or willing to believe.)

Myth No. 1: The amusements industry will always be a cash business.
Fact: Most consumers don't carry much cash today -- and when they do, they run out of it fast. When that happens, they often can't find an ATM or don't bother to look for one because they prefer to buy everything with credit cards or ATM cards anyway -- it's much more convenient.

Some operators and locations have done a good job of getting ATM machines into a lot of locations. Yet many operators stubbornly refuse to notice these facts. However, most U.S. retailers are now set up to accept plastic, even for small purchases and services that are sold "on the go." The amusement machine industry needs to catch up.

Some of us are certainly trying. As VT has reported, the U.S. vending industry is well ahead of the amusement industry when it comes to "going cashless." Why do so many amusement operators continue to support or believe the "cash is forever" myth? In part, because they don't like changing their ways -- and they do like collecting a location and taking half the cash with them and having zero receivables.

Many other operators cling to cash because they don't want to figure splits based on bill changer cash, tokens, over-the-counter sales, and discount token sales. Still others (especially in the FEC sector) don't like or don't understand the value of discounting and promotional sales and value packages, which comes with running on tokens or debit cards.

Arguably, however, the biggest source of the "cash is forever" myth is the fact that street vendors and FEC operators alike carry lots of cash around, so they think most consumers are flush with cash, too. That's flat wrong. In the meantime, however, the "cash is forever" myth refuses to die.

Myth No. 1.5: Cash is especially crucial for FECs.
For amusement parks, boardwalk arcades and some game revenue-share FECs, the "cash is forever" myth comes with a series of related or subsidiary myths: (a) "When FECs switch to debit cards, revenues are cut in half"; (b) "Tokens are a waste of time; you have to run machines on quarters"; and (c) "When you put debit card systems into locations, your coin pushers make less money and should be removed or you should not buy them."

Even some well-known game distributors now are spreading negative disinformation and confusion about debit systems. Why? Sometimes, it's because the distributor's salesman would rather have a new FEC owner devote that $60,000 to $80,000 cost of a debit system to buying more machines (provided by the distributor, of course -- or they just believe the myths). Not coincidentally, most debit systems are sold by third parties, not distributors. To be clear, this is far from all distributors -- but enough that the myth has gained wide circulation.

Of course, the myth-peddlers are right about one thing. It is quite possible to set up a debit card system and ruin your FEC business because you don't know what the heck you're doing and you don't know the five rules of how to properly run token pushers (I have written about that in The Redemption Report):

For example, charge the customer $1 for the debit card itself, which is unnecessary and makes the customer angry and causes lots of confusion (I know, it works for some well-known adult locations. But they are not your typical FEC).

Or, be penny-wise and pound-foolish during the installation and integration of debit card systems. Hire somebody who doesn't really understand the technology and can't make it work correctly.

Or, program debit cards for time play so they can't be used on the machines that your customers really want to play: redemption games, cranes and merchandisers.

Debit cards, smart cards, and ATM/credit cards are the future for street operators and FEC owners alike. The faster our industry realizes this fact and gets past these "growing pains" and misconceptions about new payment technologies, the faster we'll get in step with our customers, increase our ability to make money and fatten our bottom line.

The resistance to purchasing a debit card system still prevails even though the "float"(money on the cards not spent) is more than enough to pay for the entire debit card system in less than two years -- and that is a fact -- not to mention that debit cards almost always lead to an increase in game sales and total facility sales.

Myth No. 2: Reconditioned games are no good. They look terrible and don't work. Operators must buy only new games.
Fact: Buying top-earning new games is essential -- but a mix of new and used games is the best strategy of all. This is not news. Most operators of 50 years ago ran a mix of new and used jukeboxes, new and used pins, new and used novelties and (if they were in the vending business) new and used vending machines.

The "only new will do" myth got started during the videogame boom of 30 years ago. For about five minutes, it was true. But today we are long overdue to retire this myth. The truth is, there are many must-have "workhorse" machines from the past five to 10 years that are not manufactured any longer. (The "workhorse" games are those 20% of the game titles that make 80% of the money.)

The only way to acquire these workhorses is to purchase used, reconditioned units. If you rule out these machines simply because they are not available brand-new at far higher prices, then you have ruled out some of the biggest moneymakers in the industry.

The secret to successful operation of used equipment is to buy your reconditioned games from companies that specialize in refurbishing older machines. These "refurb" machines look as good as new and work perfectly. A smart mix of new and used games will cut an average of $1,000 off the purchase price of your machine inventory in a given location (that means a $50,000 savings on a 50-game mix of "workhorses").

In addition, the overall route or FEC makes more money if you have the "workhorses" -- regardless of whether they are new or used. Plus, the warrantees on "refurb" games from the top distributors are about the same as the manufacturers' warrantees on new games. Some even have written guarantee trade-ins or buy-backs. Currently in all of my locations the mix of new and used is approximately 50% each.

By the way, I would argue that three hours after a gameroom opens, every machine on the floor is "used" (and most of them look it, too). Not much different than driving a new car out of the showroom and its value decreases sharply.

Myth No. 3: The amusements industry is counter-cyclical. When the economy is down, amusements are up and vice-versa.
Fact: My own observations lead me to believe that the amusements industry runs in seven-year cycles, based largely on new technology acceptance cycles. I believe these cycles have been running independently of what the larger economy does.

Why seven years? It often takes that long for new technology to filter through the industry because (a) manufacturers take two or three years to perform research and product development, and find the optimum use of a new technology; (b) distributors need at least a year learn how to sell and support the resulting new machines; and (c) operators need time to accept and incorporate the new machines into their businesses.

(By the way, I have discovered that it takes a minimum of 12 times for an average person to see an ad or hear something new before their brain actually acknowledges the concept. Hopefully our industry is made up of above-average individuals.)

Digital jukeboxes are a great example. It took nearly a full decade from the time a few pioneering manufacturers began experimenting to the time these products took off. But then, they gave the whole industry a huge lift. The early penetration rates were about 5% a year of the total market.

Today I believe we are on the last part of the downward curve of a seven-year cycle. This industry enjoyed its last peak upswing in 2007, with digital jukebox sales booming. (This peak coincided with, and may have been helped by, the peak of the real-estate bubble ... more proof that we don't depend on recessions for coin-op to make money.)

By late 2007 and early 2008, the mortgage-lending crisis was upon us. As the national economy went south, so did this industry. Our customers lost income ... our locations lost traffic ... and our cashboxes lost volume.

Today we're in such a challenging period that the "counter-cyclical" myth is on the verge of being replaced by an even more damaging myth: the negative notion that the amusement and music industry has entered a permanent decline. Our great-grandfathers heard that same prediction in the early 1990s. Our fathers heard it again in the 1960s and '70s. It was a myth then; it is a myth now.

The good news is, I expect we'll see an upswing starting in 2011, heading toward another peak in 2014 ... seven years after the last peak. Business conditions in the larger economy will improve as hopefully a new Congress takes power and establishes more-predictable taxes and more-reasonable business regulations. Small businesses across the country will start generating jobs again. Consumers will have money to spend once more.

The leisure entertainment industry is predicted to be the third-leading growth sector, of course behind the public infrastructure improvements (fueled by the stimulus money) and healthcare-related industries.

When this happens, some -- not all -- operators will benefit from new money flowing through the entire U.S. economy. Which operators will prosper? The operators and FEC owners who invested in their businesses by keeping their game titles current, ruthlessly cut out deadwood machines from locations, implemented effective operating efficiencies, and modernized their operations and facilities. The operators and FEC owners who kept up with new technologies and marketing trends (such as the move away from cash, or the latest developments with leagues and birthday parties, for example). The operators who were not fooled by the industry myths!

These operators and FEC owners will be in good shape to grow when the next upswing arrives and to take advantage of their competitors who believed the myths ... and I believe the next upswing is coming sooner than any of us thinks. My bet is to follow the seven-year cycle, as it has guided me well for the past 40 years.


FRANK SENINSKY is president of Alpha-Omega Amusements (East Brunswick, NJ), parent company of Amusement Entertainment Management, a consulting agency; Alpha-BET Entertainment, a nationwide revenue sharing equipment provider; and Alpha-Omega Sales, a distributor of new and reconditioned games. During his 40 years in coin-op, Seninsky has presented nearly 300 seminars and penned more than 1,300 articles. He served as president of the Amusement and Music Operators Association and the International Association for the Leisure & Entertainment Industry. He is editor of The Redemption Report and an instructor at Foundations Entertainment University. Seninsky can be reached at (732) 254-3773 or by emailing fseninsky@aol.com.


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