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Issue Date: Vol. 44, No. 11, November 2004, Posted On: 11/8/2004


The Urge To Merge


Marcus Webb

Successful shows were the rule in 2004. ATEI, ASI, Nightclub and Bar Show, E3, AMOA-Fun Expo, NAMA and Global Gaming Expo all ranged from good to sensational. IAAPA will probably be strong, too. Since we know trade shows traditionally function as business barometers, is today's "weather" really that good for the entertainment and convenience machine industries?

Let's look at the numbers. While the $6 billion U.S. amusements trade does have a slight countercyclical pattern, for the most part earnings rise when more Americans are working and the economy is growing - as it is now. On the vending side, stability and (gradual) consolidation continue to go hand in hand for manufacturers, vendible products suppliers and operators in this $43 billion U.S. industry. As for our competition, this year home video is relatively soft , "only" about $25 billion worldwide ($10 billion in the U.S.). Casinos generate $27 billion here; slots, VLTs and table games earn $3.6 trillion worldwide.

Two consistent trends are occurring for amusements, home video, vending and gambling. First, technology is advancing across the board, from downloading to WiFi, from RFID to cashless operations and from GPS to bioscans.

But the biggest across-the-board trend is "M&A" (mergers and acquisitions). Conglomerates in all of these machine-based industries are continuing to buy each other. On the vending products side, the M&A revolution peaked a few years ago and we're beginning to see a counter trend. In the home video world, Midway Games has just purchased Inevitable Entertainment. The Motley Fool financial advisors commented: "In the video-game software business, 'mini-mergers' are far more common than mega-mergers, where large, publicly traded entities such as Electronic Arts and Activision shell out shares or cash to take out their publicly traded competition." But one way or another, mergers are happening there, too.

In the gambling business, mega-mergers are occurring on multiple levels. Manufacturing: IGT buys Acres; Alliance/Bally buys Sierra Design Group. Operations: the largest pending mergers in the entire world today, for any industry, are the $10 billion Harrah's-Caesars deal and the $9 billion MGM-Mirage-Mandalay Bay sale.

The amusements industry is experiencing mergers on multiple levels, too. Coin-op is becoming smaller yet stronger, since greater market concentration means greater market power. Every year we have fewer operators, fewer distributors and fewer locations (and a turnover among manufacturers: some arrive, others leave). But survivors on all three levels are healthier.

Examples of the urge to merge: Harbour Group purchased Merit and Rowe, and is reportedly shopping for an upright video manufacturer. Coinstar purchased Sugarloaf (which itself recently acquired the bulk vending giant Folz Vending). Sammy finalized its purchase of Sega on Oct. 1 to become the world's largest amusement manufacturing company, as well as a leading operator. Dave & Buster's has just arranged to roll up nine Jillian's stores.

How vulnerable is the American operator amidst all this merger madness? One market analyst might say amusements remains a remarkably fragmented industry that will continue to resist vertical integration because , as some 3,000 to 5,000 operators love to point out , large conglomerates do not excel at servicing quirky, local clients.

Another analyst might suggest this industry is ripe for takeover by two or three national firms that can focus on providing downloaded content and services (entertainment, cash, credit advance, WiFi and vended/downloaded product sales) to a nationwide network of reliable machines. This second analyst might predict that in 20 years, our market will look more like that of the United Kingdom, where thousands upon thousands of wired machines are run by a single nationwide operation.

Which future will we get? Consolidation or continued fragmentation? The outcome depends on so many factors that it's impossible to predict. But if you want a clear mental picture of today's worldwide pay-per-transaction machine industries (plural), visualize a vast ocean of "big fish" who are rapidly gobbling up smaller fish. Becoming faster, smarter, stronger. And smiling.

Topic: Editorial: Music and Games

Articles:
  • Churn, Baby, Churn. Declining Dynamism In Larger Economy
  • Lessons Learned From The Life Of The Mad Mogul Felix Dennis
  • Can Operators Cash In On Heavy Summer Traffic?
  • Are Vendors Adapting Too Slowly To Changing Retail Landscape?
  • The Dangers Of Binary Thinking In A Complex World

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