U.S.A. - As the American domestic economy gradually rebounded in 2003, the American amusement machine industry appeared hopeful, stable and profitable. At the same time, no return to boom conditions appeared in sight. Last year, industry grosses inched up by just under 2% for the year, according to the last VENDING TIMES Census of the Industry. Such a growth rate is slightly higher than the annual rate of inflation in the overall economy. Observers expect similar results in 2003.
After at least eight years of consolidation, the industry's stubborn refusal to rebound remains a complex mystery. American consumers certainly have more money to spend, as evidenced by a rampaging 8% growth rate in the third quarter that was largely powered by consumer spending. And, entertainment as a whole is booming, according to respected sources like media analyst Michael Wolf, author of The Entertainment Economy. Wolf, who consults for media giants from Universal to Bertelsmann. He claims American consumers now spend more money each year on leisure and entertainment, than they spend on clothing and healthcare.
Against this booming backdrop, and with a generally acknowledged strong crop of new coin-op games this year, many manufacturers and distributors are asking: Why aren't operators investing more heavily in new equipment?
Without question, operators have the resources to invest if they want to. For the second year in a row, many leading operators reported seeing their "best year ever" in 2003. The VT Census reported that for all categories of equipment, U.S. operators pulled in approximately $6.095 billion in revenues in 2002; the number may well be higher for 2003 when the facts are in.
Yet cash-rich street routes and recovering arcades did not appear to translate into strong investment in new machines. According to some estimates, American operators spent approximately $400 million dollars on new machines this year. If so, that represents an investment of approximately one dollar for every $15 of gross revenues.
Taken out of context, that figure might appear to be a reasonably robust investment budget. But context is everything, and by many other measures, operator investment appears to be lagging. Manufacturers and distributors say, and operators do not deny, that the average age of machines on American locations is growing. Some of the nation's most successful operators assert that a healthy route or arcade must invest up to 30% of net revenues to maintain competitive viability. If so, very few operators meet that criterion.
Another yardstick: The number of unserved or underserved locations is considerable. In the tavern market alone, an estimated 80% of licensed locations do not have coin-op equipment. The percentage of unpenetrated restaurants, pizzerias, nightclubs and other types of potentially profitable stops could be even higher.
The most important yardstick in the eyes of the manufacturing and distributing sectors is sales. The sheer number of machines sold annually in most categories is flat or declining over the long term. This includes jukeboxes, pool tables, video games, redemption, pinball and most other categories of amusement equipment. There are exceptions, of course, led by touchscreen video systems and upright golf games. Kiddie rides and merchandisers are also trending up, if mildly. But these remain lonely outposts of growth in a larger sea of consolidation.
VT followed the investment debate all year as to whether operator spending was growing, and whether operators are investing "enough" money in new equipment. Opinions on this question, unsurprisingly, varied wildly. But even executives from leading manufacturers admitted that operator buying remains ultra-cautious. Bob Mills, vice-president of networked business for Merit Industries, told VT this fall: "Operators these days are so cautious about buying new equipment, most want to wait six months on every new title , even from established sources , to make sure somebody else is making money with it first."
Most manufacturing executives don't like to be quoted criticizing their customers. But in private, many manufacturers continued to complain during 2003 that too many operators remain in a sales-resistant posture. "You can't print that I am the one who said this," said one manufacturer who is known for publicly boosting the industry. "But operators are just flatly refusing to buy. We make very high-earning games. Apparently, that's not enough. What are we supposed to do?"
Operators retorted that they have no obligation to buy new equipment simply to support manufacturers' R&D effort. New equipment must justify itself not only in terms of individual earnings, but also in terms of bringing new business into a location, they say. This argument broke out vigorously in the AMOA International Expo on at least two occasions. VT columnist Frank Seninsky of Alpha-Omega Amusements (E. Brunswick, NJ) defended operator buying caution both times. In one heavily marketed event, Seninsky debated Worldwide Video Entertainment's Brad Brown. Seninsky took the same stand in another impromptu debate against AAMA chairman Frank Cosentino. Ironically, when it comes to his own business, Seninsky is an eager investor in new equipment.
The very longevity of staple equipment, be it a jukebox, a pool table, or a redemption game, is a double-edged sword for manufacturers and distributors. On the one hand, longevity is a major selling point. On the other hand, longevity precludes the need for quick replacement. This factor is a key reason for operator sales resistance, according to Dave Myers of Lake Champlain Entertainment (Lake Champlain, VT). Now an operator, Myers has long experience in both manufacturing and distribution. Myers was still part of the Merit organization at the start of this year when he told VT: "Part of the situation faced by today's distributors and manufacturers, let's be realistic, is that operators are primarily making money by focusing on staple games , from countertops to merchandisers , that don't have to be replaced quickly. Operators who are doing that, plus recycling older driving games, are making a ton of money."
If many operators are over-cautious about buying new machines, there are still some notable exceptions. Some operators strongly agree with manufacturer criticisms that their colleagues are, by and large, under-investing. And, these operators point out that while manufacturers may suffer from under-investment in the short run, operators who under-invest also damage themselves and their businesses in the long run.
Phil McBride of T&G Music (Titusville, FL) told VT in late summer: "In regions where nobody is leading the market, operators are bleeding their routes by taking the money out of the cashbox without reinvesting in newer machines. Today you have to invest 25% to 30% of what you take in, to keep your route current. Otherwise, you're just cashing out early. You can't keep up with the industry and you get caught in a downward spiral. As your equipment ages, collections drop and replacing machines becomes even harder."
Some industry leaders detected signs that operator purse strings may be loosening this year. In May, Brady Distributing Co. vice-president Jon W. Brady said equipment sales were "picking up a notch in the last six weeks," particularly for video games. The combination of pent-up demand, resulting from years of cautious buying , together with an unusually strong field of new video games in 2003 , has created a market where operators "are in much more of a buying mode," Brady said.
Some of the most professional operators reserve a strict percentage of revenues for reinvestment, but not all good operators follow this policy. Some highly successful operators say their new equipment buys are driven by the availability of profitable equipment: if it's offered, they buy heavily. If it's not available, they wait. Ray Shroyer of Metro Amusement (Streator, IL) explained his buying strategy this way: "Everybody has to buy a filler now and then. But I would rather buy higher numbers of a good piece, than spread out my purchase dollars simply for the sake of variety."It appears that the only conclusion to the industry's long-running debate about over-investment versus under-investment will come with a new boom of equipment sales on the order of those seen in 1979, 1986, and the mid-1990s. Such an explosion does not appear imminent. Accordingly, industry members can expect the investment debate to continue for the foreseeable future.