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Issue Date: Vol. 41, No. 6 / June 25, 2001 - July 24, 2001, Posted On: 6/25/2001


Operators Struggle For The Right Price: Competitive Marketplace Hinders Improvement In Commission Structures And Per-Play Charges


By Kevin Kenyon

U.S.A. - What's a game or a song worth? What percentage of the cash box should an operator be entitled to? How about the location?

In today's competitive marketplace, the answers to these questions can determine success and failure.

This is especially true at a time when operators are faced with ever-increasing overhead costs, whether it be record-setting gasoline prices, rising health insurance premiums or the increasing cost of the equipment itself.

In the face of this scenario, operators understand that the ability to increase transaction value in locations is vital to the future of their businesses. It comes down to a simple rule of business: if you have more money heading out the door, you need to make sure that more money is coming in.

For operators, there are generally only two solutions to a cash-flow problem: either increase the transaction price of the equipment or negotiate a more favorable commission structure with the location.

Unfortunately, as any operator knows, both are easier said than done. Although there may be a handful of exceptions, a pricing increase will always be met with resistance. Complaints from customers, at least early on, will inevitably make their way back to the "greedy" operator who had the nerve, after 10 years, to change the jukebox from four plays to a dollar to two plays for a dollar.

By the same token, it can also be difficult to persuade locations to alter commission structures that have been in place for decades. Operators should be prepared to provide ample evidence, for example, why Johnny's Tavern should go from a 50/50 to a 60/40 commission structure in favor of the operator after 30 years of splitting the cash box in half.

There is also the wildcard to consider , the competition. Since operators don't run their businesses in a bubble, pricing and commission structures are often dictated by the circumstances of the local market. If the operator down the street is offering a location 60% of the cash box, for example, it can be difficult to convince that same location it would be better off giving another operator 60% instead.

The combination of these factors is putting operators in a Catch 22: they must squeeze every quarter out of each location while not making it too easy for the competition to undercut them.

One operator that has been able to overcome this obstacle is Kama Reed of BJ Novelty Inc. (Covington, KY). For years, Reed, together with husband Jeff, has been looking for ways to increase the company's revenue in the face of sky-high competition.

"Here in greater Cincinnati, we are in a very competitive marketplace," she explained. "The challenge we face on a daily basis is operators wanting to keep the same commission scales and the same pricing that their father or grandfathers did way back when."

Those operators, she added, make it difficult for a company like BJ Novelty to convince locations that changes are necessary. Just last month, after BJ Novelty had instituted a two songs for $1 jukebox pricing scheme, competing operators attempted to "steal" her locations by convincing them that they would be better off changing the pricing on their jukeboxes back to four plays for $1.

"In our market it's very difficult," she said, "because we still have operators charging four and even five plays for a dollar on a CD jukebox."

That type of thinking, Reed added, has made it extremely difficult for vending operators to remain profitable.

INSUFFICIENT RETURNS

"Your revenue is stagnant, yet at the same time your costs are skyrocketing," she said. "You have to factor in the updates every year, the gas for the service trucks, health insurance. All these costs are rising but nobody is doing anything about it."

Armed with new technology, however, Reed noted that BJ Novelty has recently been able to make strides in changing the market, including increasing price per play and negotiating more favorable commission structures.

The online revolution currently underway in coin-op, she explained, has given BJ Novelty the perfect opportunity to shake up those outdated pricing structures. The company currently operates a wide range of online-enabled equipment, including Merit's new "TournaMAXX" software, Incredible Technologies' latest 2002 courses for "Golden Tee Golf," uWink terminals and TouchTunes' digital downloading jukeboxes.

While many operators have encountered difficulty in persuading locations to install the dedicated phone lines needed for online equipment, BJ Novelty has eliminated that problem entirely by agreeing to install and pay for the lines. The company also pays for the phone bills each month in certain locations.

Although it may take a financial hit up front, Reed noted that installing the lines gives her company the leverage it needs to make the necessary changes.

"The basic idea is that we agree to install and pay for the phone line and to provide all of the latest equipment as soon as it becomes available," she said. "In return, we make sure that they understand that we need to be able to set the pricing and the commission scale."

THE RIGHT MOVE

Although most of its commission structures are negotiated for individual pieces of equipment, BJ Novelty has generally moved from the traditional 50/50 split to a more favorable 60/40 ratio. For its downloading jukeboxes, the company also negotiated a deal to take downloading (charged by TouchTunes) and Jukebox Licensing Office fees off the top before the split, essentially allowing the equipment to pay the fees itself.

For its "Golden Tee" golf games, which are updated as soon as new software becomes available, BJ Novelty negotiated a 60/40 split. The company also increased the price per play by a quarter for three holes, only a nickel of which goes to the location.

"From our end, we agreed to have the latest upgrade in the location six weeks before the competition," she said. "In return, we explained that we needed the 20 increase. The location is still happy because it's getting that nickel on top of what it was getting before."

In addition to installing phone lines, BJ Novelty has put a significant emphasis on educating locations about the new equipment.

That process involves making sure that the locations understand the difference between the latest technology and outdated equipment, such as the sound quality of a downloading jukebox versus that of a five to 10-year old CD jukebox. Once that has been accomplished, she added, the location will have a better understanding when a competing operator walks through the door offering cheaper equipment.

"You have to convince them that their customers want high-end entertainment products," she said. "The idea is that customers will come and stay longer in their location because it has better entertainment options than the guy down the street."

The ability to have greater control over pricing, Reed emphasized, has finally allowed BJ Novelty to break out of the downward spiral that many operators have been experiencing in recent years.

"It enables you to achieve a greater amount of income, which in turn makes your company healthy enough to be able to purchase the latest equipment," she said. "As long as you're charging the appropriate amount and getting the proper percentage, it makes it a lot easier to go out and get the best equipment available."

In markets where a 50/50 commission structure is the norm, operators must look to pricing in order to increase profits along their routes.

One such company is A.H. Entertainers (Rolling Meadows, IL), which has been gradually adjusting its prices over the past three years or so.

According to A.H.'s Chris Hesch, the company recently changed the pricing on 80% of its jukeboxes to two plays for $1 during the process of swapping its CD jukeboxes with digital downloading units.

A SMART MOVE

A couple of years ago, he added, the company finally bumped up its pool tables up to a dollar per play, and is currently looking to bring its dart and cricket games up a quarter to 75.

With games that are in high demand, such as "Golden Tee Golf," A.H. has been able to negotiate minimums with locations, allowing the company to take the first $75 off the top.

"We go about it that way instead of trying to change the commission structure," he said. "It just makes more sense considering the obstacles in the market. You can play with price increases and getting guarantees if somebody really wants a piece, but the market will always dictate commission structures. It basically comes down to supply and demand."

In the process of increasing its pricing, it's not surprising that A.H. has encountered some resistance along the way. According to Hesch, resistance is just something operators must face.

"It's always a concern and it's something you have to fight through," he said. "You really have to prove to the location that each time you increase prices they will make more money."

In an effort to persuade reluctant locations, Hesch noted that A.H. asks them to at least try a two to four week trial under the new pricing scheme, with the idea that they will be swayed by the resulting increase in cash box revenue. The key, he said, is to weather the storms until the numbers come in.

"If you have a very active bar owner he will hear from the customers, and those complaints usually get passed back to the operator," he said. "We tell them to hang in there for a few weeks and the complaints will die down, and that's usually what happens."

Sometimes the company has been forced to change the pricing back to its previous levels due to an overwhelming backlash, although Hesch says those cases are rare.

"There are always some locations that will just refuse to go for the new prices, no matter how much more they can make," he said. "The reason that only 80% of our jukeboxes are at the new price structure is that some people just wouldn't buy into it."

Although operators can always increase prices on a whim, it always makes it easier when they can justify the changes. According to Mark Balint of Coastal Vending Co., (Washington, DC), the emergence of Internet-enabled equipment presents the perfect opportunity to make long overdue adjustments to commission structures and play prices. The problem, he added, is that not enough operators are taking advantage of that opportunity.

"I think we've been our own worst enemy by not seizing new technologies and the opportunities they represent," he said. "The ranks have closed in on operators in recent years, and it's time for the guys that have made it to rethink things like giving half of the money away."

To that end, Balint has negotiated more favorable splits with locations during the process of hooking up phone lines for online countertops and jukeboxes, even going with 50/50 net rather than the traditional 50/50 gross with some locations. He is also taking a percentage of the cash box off the top for promotions such as online tournaments.

The ability of operators to generate additional income is based on the law of supply and demand.

According to Bill Smythe of Indy Amusements (Indianapolis), one reason why operators are suffering right now is because demand is down. When driving games were all the rage a few years ago, he explained, the company was able to charge, and get, "healthy" minimums. Around the same time, when Incredible Technologies rolled out its first tournament-enabled golf game, Smythe benefited from being the first operator in Indianapolis to buy the machines by taking 100% of the gross revenue on the machines during tournament play.

Now, due to the loss of earnings in the video game category, the company is unable to negotiate as many minimums as it used to. However, because of the high cost of video games today, Indy Amusements currently operates all of its video equipment on a 60/40 split.

LIVING WITH THE PAST

Besides dwindling revenues, Smythe noted that operators must deal with the unrealistic expectations that locations have when it comes to commission structures, a problem he believes is due in great part to operators themselves.

"We created our own problems by giving the cash box away," he said. "We spoiled them for years and years and gave them anything they wanted, so we shouldn't be surprised when they expect the world and then some."

Those unrealistic expectations, he added, often make it difficult for operators trying to pitch new accounts.

"In our case, we try to justify why we ask for what we ask for, but at the same time we don't try to kid them," he said. "We know the minute we leave the next guy will come through the door offering to beat our deal."

While getting new accounts is always a plus, Smythe noted that Indy Amusements will not "bend over backwards" to get an account if it means losing money in the long run. For this reason, he added, the company does not pursue as many new accounts as it used to.

"There will always be operators that will provide service for a lesser split or try to undercut you, but those operators won't be around for long," he said. "The smart operators are justifying changes in the commission structure based on the cost of doing business, realizing that they can't survive any other way."

Smythe takes a similar hard-line approach when it comes to raising prices on equipment, regardless of the complaints that inevitably follow.

STAND YOUR GROUND

"Sure I get complaints: I heard it when I moved pool from 50 to 75, and I'll hear it again when I move it from 75 to $1, but my answer will always be the same , I don't have a choice," he said. "I tell them to let me know when gasoline stays the same price for five years. I don't want to seem impervious to the wishes of the patrons or the accounts, but why should I lose money?"

To Smythe, the cash flow problem in coin-op is best illustrated by the number of operators looking to get out of the business right now.

"I hear a lot of talk from operators that are planning to get out of the business in a couple of years," he said. "You have to question why reputable business people want to get out of this industry. The answer is because they can't make any money, and there's far too many problems for the amount of money they do make. So, if I raise prices it's because I think it's necessary or warranted, based upon the type of equipment or services provided, and if someone is willing to come in and undercut me and lose money, there's nothing I can do about it."


Topic: Music and Games Features

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