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Issue Date: Vol. 44, No. 8, August 2004, Posted On: 8/19/2004


QUESTIONS & ANSWERS: Incredible Technologies Tackles Industry Controversies Head On


Marcus Webb

ARLINGTON HEIGHTS, IL Incredible Technologies announced on June 3 a new distribution and sales policy that allowed operators to purchase equipment direct from the company. The policy was effective immediately, and it enabled operators who were members of the Amusement and Music Operators Association, or of bona fide state operator associations, to purchase equipment directly from IT, using the same tiered pricing as distributors.

Service, parts, and eventually financing will also be offered by IT, said officials. Announcement of the new policy triggered defections by several major distributors whose executives sharply criticized the change. IT also terminated Betson as an authorized distributor, citing conflict of interest. Betson executives said they voluntarily dropped the IT line in protest of the new policy. In mid-July, VT interviewed IT CEO Elaine Hodgson and vice-president of sales Don Pesceone to learn more about the new policy and its implications for IT, distribution and the industry at large.


 

VENDING TIMES: What reaction have you had from operators to your new direct sales policy?

PESCEONE: We have talked to a large number of operators and the results have been exceedingly positive. We have assured them that they have the option of purchasing our products from their local distributor or from us. The choice is theirs. They have been very happy with the new pricing and direct service support from IT. They have been impressed with the guaranteed turnaround time for service work, along with the dramatic savings that are key to the new sales plan.

Can you quantify that reaction in terms of numbers of operators who buy direct from IT or who have indicated they will do so?

PESCEONE: It is too early to give an accurate number, but of the operators that have been contacted, over 75% have expressed an interest in purchasing from us.

We are reliably informed that one major operator penciled out the IT price structure and decided he would save $10 per game by continuing to purchase your games through his distributor. Did you anticipate this would be the result in some cases?

HODGSON: Yes. Our program was never about removing distribution. It is about offering options to our customers. The operator you mentioned is a good customer and I am sure that his distributor works hard to keep him happy and satisfied with pricing and service.

Is this outcome equally as desirable for IT as is direct sales from IT to the operator?

HODGSON: This is equally desirable for IT. Some areas of the country are well served by their local distributors and we will continue to support those distributors.

Is it equally profitable for IT?

HODGSON: Our pricing is evident for all to see. It is based on volume sales to our customer. We will be able to make a profit on this sale because that particular distributor buys high volumes of our product and keeps their customers happy. Your example shows that our method does not exclude distribution, but allows them to handle our products and make a profit by providing a great service for their customers.

Obviously several leading distributors have dropped the IT line amid a flurry of harsh criticisms and accusations. By your count, how many distributors continue to carry the IT line and how many have dropped it at this point?

PESCEONE: Ninety percent of the distributors that carry our product line are still doing business with us. Currently only five distributors have decided to drop the IT line since our changes were announced, but just as many new companies have joined since that time. Betson no longer carries our products, but we parted ways prior to implementing the new direction. IT continues to support all distributors and looks forward to continuing these strong relationships. In fact, some distributors who have publicly criticized our policies continue to support our products.

Some disaffected distributors have claimed that IT is "ungrateful for past distributor support."

HODGSON: We are not "ungrateful" for past distributor support. Distributors have made a lot of money selling our products and that is the reward for their work. However, it is not good business for us to blindly support a structure that does not spur aggressive sales of our product, because some personal feelings may be hurt. Our new program still allows distributors to buy our products and make decent margins through volume discounts and value added services. The good business people in this industry will realize this and flourish.

Another defecting distributor said that IT has "basically terminated distribution." Your reaction?

HODGSON: IT is one manufacturer. Distribution handles many other manufacturers' lines. We do not think that our policies will affect distribution as a whole. The only distributor we terminated was Betson and that's because they're a manufacturer-competitor. We asked other distributors to look at our policy and make their choice. Some said it would work for them and others didn't. More have gone along with it than haven't.

Okay, we've also heard distributor complaints that IT did not consult distribution prior to adopting the new policy. Did you consult distribution beforehand?

HODGSON: We had meetings with a variety of operators, individually and collectively, to get their opinions on distribution and the state of the industry. We had meetings with individual distributors to talk about their policies, practices and value added. We had discussions with other distributors on our dissatisfaction with their performance. We did not have a formal meeting with all distributors in one room to discuss our new program. I don't think there would have been any benefit to this. We did our homework and after a lot of consideration decided that this direction is right for our business and our customers.

There were also charges made by some alienated distributors that IT is preparing to sell direct to locations, either deliberately or unintentionally due to the difficulty of screening buyers. Can you address that claim?

HODGSON: IT is not interested in selling direct to locations, and we are taking steps to avoid this as best as we can. IT will not sell to any operator who is not a member of the AMOA or a sanctioned state operator association. When we traced equipment that is owned by a location we discovered that about half was sold directly by distribution and half by operators. We would encourage all distributors to embrace our policy of only selling equipment to operators who are members of either the AMOA or their local state trade association.

The most extreme statement we heard, from more than one distributor, was that IT's direct sales policy is a fundamental threat to the health and integrity of the amusement machine industry. Your comment?

HODGSON: I totally disagree with this statement. Giving the customer a choice is not a fundamental threat to the health and integrity of the amusement industry. The operator can look at our prices and decide if it is better for them to buy from IT or from their distributor. If the distributor is providing valuable services and pricing them fairly, they will get the business. If the distributor is not providing services or charging too much, the operator will have a choice. This means that the operator will get a good value for their dollar. The money circulating in this industry will be more efficient and give a better return on investment. Distributors need to look at their business methods, reduce overhead and provide valuable services. I think our actions will make our industry better.

Is it your judgment that these criticisms arise more from anger at loss of distributor prerogatives and potential loss of business, or from fear that additional manufacturers will move to a direct sales posture?

HODGSON: I think it is all of the above and the fear of change. Change is very difficult. Even if the status quo is bad, people are reluctant to change to an unknown. Some distributors have already been diversifying their businesses by becoming operators and manufacturers. IT is not doing anything more horrible than that, but it is change.

When IT announced the new policy in June, Elaine said that many manufacturers are already shipping direct to operators but doing so quietly. Does this refer to more than just "national accounts" like major arcade chains? If so, how far does it go , to the regional powerhouse operators, to the midsize operators, to small operators?

PESCEONE: Through our first month of direct sales it is interesting to discover that many other manufacturers have attempted to sell direct prior to our new direction. Sega has had no choice but to sell "Derby Owners Club" direct as the majority of distribution would not stock the product. Other examples include direct sales to Wal-Mart operators by many video amusement manufacturers. Global VR has approached many large "Golden Tee" operators with large discounts if they convert all of their "Golden Tees" to "PGA" games. These conversion kits were to be sold direct, under the table, to the operators direct from the manufacturer. [See sidebar.] Betson Manufacturing has been very aggressive selling their products through their Betson Imperial Sales team. Many of these attempts have happened right under the noses of some excellent distributors. The point here is that IT publicly announced plans to do this. Others have chosen the safer, quieter, under-the-radar method. [Editor's note: Betson Enterprises executives told VT that all their sales efforts have been proper and above board.]

What percentage of current new machine sales (non-IT equipment) is direct from factory to operator, in your estimation?

PESCEONE: We cannot estimate the amount of product sold by other manufacturers to operators. Through the first month we are seeing a nice blend of both. Many distributors have seized the opportunity and are aggressively selling into markets that were abandoned by distribution. Sales have increased dramatically for three distributors specifically. As far as a percentage of equipment sales, we are seeing a 50-50 split with the majority of the operators saving $400-800 per unit at the wholesale level compared to what they were paying.

How many major manufacturers in effect have an IT type of "equal opportunity" sales policy for distributors and operators, but don't spotlight it?

HODGSON: We do not know the different prices that other manufacturers sell to other entities. We have always had a policy of offering exactly the same deal to all of our customers regardless of their size. We did not offer special deals to distributors who demanded special treatment. We are now opening the direct selling of our products to more customers. Everyone can be assured that they are getting exactly the same deal as everyone else.

Disaffected distributors and some operators continue to claim, or fear, that IT will eventually bypass the operator and operate its own equipment. You have also denied this charge endlessly, but please take this opportunity to explain in detail your rationale. Why is such vertical integration not good for IT, or not attractive to IT?

HODGSON: Our focus is designing and manufacturing on-premise entertainment products. This is very expensive and difficult. We have been successful at it and that is our core competency. It is what we enjoy. This is challenge enough. Operating games and relationships with locations is a whole other business. It takes different types of employees, equipment and temperament. If we were going to change our business direction it would be to something like home consumer games or some form of electronic entertainment, not operations.

Some operators have raised the possibility that IT could be sold to a buyer who doesn't have your scruples against direct sales to locations or against vertical integration. Given the acquisitions of Merit, Rowe, Valley-Dynamo, Sega, Happ, etc., in recent times, that is not necessarily an unreasonable issue to raise. Your response?

HODGSON: I cannot predict, and do not wish to speculate on, the future. At this moment we are not in negotiations to be purchased by anyone. But if this ever happens, operators will still have a choice to support whomever they wish.

Regarding IT methods to qualify potential buyers, did IT consult with AMOA prior to announcing the new sales policy?

HODGSON: We have been members of AMOA for 15 years and have a great respect for that organization. We have had discussions with the leadership of the AMOA for quite some time on the definition of "what is an operator?" These talks began after one of their members requested that we disable a tournament game that was owned by a location where they used to operate. As a sign of respect we notified the AMOA immediately before our announcement so that they would not be taken by surprise. Under their direction we included a line in our press release that stated that we were initiating this new policy without the approval of the AMOA. We anticipate that we will to continue to have a good relationship with them.

Did IT inquire as to how (or whether) AMOA screens locations for membership status, since AMOA membership is apparently IT's main criterion to distinguish operators from locations?

HODGSON: It is not entirely clear to me how the AMOA screens applicants for membership status. I believe that a membership with the AMOA or affiliate state association is the best definition of a legitimate operator that we have in this industry.

AMOA president Chris Warren issued a statement in late June saying that AMOA did not participate in creating the IT policy and neither approves nor disapproves. Do you have any reaction to that statement?

HODGSON: It is accurate. We never asked AMOA for approval and we believe that it would be inappropriate for an industry trade association to approve or disapprove of any of the legitimate policies of one of their member companies.

At least one past president of AMOA predicts the organization will now be forced to adopt more stringent methods of qualifying operators and screening out locations. On the other hand, AMOA executive vice-president Jack Kelleher has stated that AMOA does not intend to address this issue nor get in the middle of any controversy over same' Would you welcome a change or clarification in AMOA membership qualification procedures in this regard?

HODGSON: We would welcome a solid definition of what an operator is. Operators want products to only be sold to "real" operators, but there is no definition or qualification and we believe that the AMOA has the best knowledge to help create that definition.

If AMOA does not tighten up its screening procedures to ensure that locations do not become members of the association, does IT have a backup plan to screen out potential location buyers of IT games?

HODGSON: We will use the AMOA membership as our definition. This is more than others have done. It is clear that distributors and operators have sold equipment to locations through the years. In fact, our research has shown that half of online Golden Tees that are location-owned were sold direct by distributors, with the rest sold by operators. We cannot control this practice, nor can the AMOA. What we can do is support legitimate operator associations who care about the overall health of the industry, not just a quick buck. We announced a plan to eliminate direct-to-location sales as best as possible, and will not spend time looking for ways to get around our own policies.

Some distributors and operators complain about location-owned machines, but other distributors and operators sell machines to locations. A prominent AMOA member has even said, "Everybody sells to locations to some extent, sooner or later." How have you handled complaints about this?

PESCEONE: In the past when people have come to us, whether they were operators or distributors, to complain about suspected location-owed equipment, they gave us serial numbers to check on the machines. When we checked, we found that over half the suspect machines were never registered to an operator. Sources were across the board. You can't pinpoint all of them, but we did address those where we saw a pattern.

Have any distributors stepped forward to praise and support the new sales policy or at least said, "We understand why you did it"?

PESCEONE: Many distributors, including those who have chosen to suspend relations with IT, have stated that they understand why we did what we did. They just cannot endorse this decision because they are concerned that it may negatively impact the rest of their business. While some were angry and disappointed, most of them can see the reasons, and have seen this coming for a long time.

One of IT's stated purposes in adopting its new equal-opportunity sales policy was to spur distributors who keep the IT line to do a better job by offering both a good example and competition from IT itself. Is this part of the strategy working? Can you give us any examples?

PESCEONE: Many traditional distributors have risen to the challenge and are very happy with the opportunities available to them. Some have re-evaluated their practices and are becoming stronger sales organizations. So far we find it very encouraging.

When did IT first begin considering its new distribution policy? Was there a specific trigger, turning point or "last straw" that led to it finally being adopted?

HODGSON: We started to get worried when some distributorships went bankrupt and others started merging. The result was fewer showrooms, less distributor sales people calling on customers, less distributor salespeople learning manufacturers' products. The IT technical services department has been handling most of the service of IT products for many years. The last straw was Betson.

How so?

HODGSON: Betson tried to dictate special pricing to undercut competition and asked for unreasonable sales incentives and on-line fees that were not earned or warranted. We determined that Betson was no longer a good representative of our products, since they are a competing manufacturer and clearly promote their products over others. At this time we determined it was best for our customers to have a volume discount pricing system that was open and clear to all.

In announcing the new policy, IT said one reason for it was that too many distributors were inadequately representing and communicating the IT message. What percentage of distributors would you say are failing to adequately perform their sales, promotional, and educational functions? A quarter? Half? More than half?

HODGSON: More than half.

Service, financing, trade-ins, parts & warranty issues are of great interest to operators. Can you further outline how IT will handle these?

PESCEONE: We will handle advance replacements, parts sales and warranty issues directly with the customer. We will handle all service calls like we have been. We also have worked out some great prices for shipping our products to our customers. We believe the costs will be less expensive than ever due to the volume we expect.  Since we will be setting up the shipping for our customers, we will also handle any damage claims. Regarding trade-ins, as we polled operators, we learned that many felt traditional trade-ins through distribution were not in their best interest. They are doing better with auctions and eBay, where they can get maximum returns. So there is no need for an IT trade-in policy. We are not taking trade-ins but from a development side, we are developing kits that an operator can easily install into their old wood. "Silver Strike" is the start and it's working well.

HODGSON: We are currently exploring financing options by an external company. We are aggressively looking at the possibilities.

How many people have been or will be added to the various departments that handle these functions , sales to operators, service and finance?

PESCEONE: We have recently added four new sales people, bringing the total to 10. We are well staffed with customer service and technical service people, and will add additional manpower as needed. By the way, our four new sales executives are experienced professionals who come from many different industries. Our objective when hiring was to challenge the way this industry typically sells product. We are fortunate to already have four outstanding outside sales managers in place.

How will IT play the traditional distributor's role of advising and educating operators about the best equipment to buy and the best methods to maximize profits from your equipment?

PESCEONE: The four new inside sales reps will contact every operator six times per year via phone calls, e-mails, fax programs, direct mail and face-to-face contact. We have been educating operators about our products and the best methods to maximize profits with them for several years. We will continue to do this with more mailings, direct contact and operator summits in the future. We also found that quite often a distributor's product recommendation was based more on the amount of money that would be made by the distributor than on the money that would be made by the operator. Some manufacturers offered money directly to the distributor's salesmen to enhance their recommendations.

How many operators does IT believe are in the USA today? Are there other specific regions beyond the Northeast where you expect your new policy will be particularly helpful in boosting IT equipment sales?

HODGSON: We believe there are approximately 4,000 to 5,000 operators in the U.S. There will probably be more consolidation in the future. We believe equipment sales will increase in all regions of the country.

Do you agree with the feeling of many manufacturers, and the chairman of AAMA, that many operators refuse to buy new machines unless locations and/or competitive factors pressure them to do so?

HODGSON: Each operator has a different business model so it is hard to generalize. Operators should buy new machines that make them money and grow their business. It is our job to provide those opportunities through long-lasting games with good return on investment. If we can do that, it is a win for everyone.

Elaine, you have pointed out that the structure and practices of the industry have undergone a fundamental shift already, with the lines "being blurred" between the thre


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