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Operators Say They Are Investing Enough; Others Disagree

Posted On: 2/25/2003

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U.S.A. - When times are good for the amusement machine industry, nobody asks whether operators are investing enough into routes and fun centers. But since the mid-1990s, as more major manufacturers and distributors have begun exiting the industry each year, certain questions are being asked (and re-asked) with increasing urgency. Are operators buying enough new equipment?

Other questions include: how much should operators invest? What obligation do operators have, if any, to support manufacturers? Leading trade professionals hotly dispute the answers to these questions. The range of opinion reveals a sharp split within the industry, but also offers some thoughtful analysis of coin-op's current woes and opportunities.

"Too many existing operators are hunkered down in a change-resistant, no-reinvestment posture'Operator sales resistance is at an all-time high. One result is that we don't have the reinvestment that we need to fully fuel the demand and supply cycle. There is not enough capital moving through the system to encourage manufacturers to do needed R&D in some cases."

This charge comes from a man who works both sides of the fence. Harold Skripsky, chairman of Leisure Entertainment Trade Shows, owner of Fun Expo, is a former operator and now a sometime game designer/developer through his AGI Inc. He made this comment last fall in an interview with VT.

"It's not the operator's position to buy stuff to fund R&D for games that don't make money," argued another man who works both sides of the fence. Operator Dave Myers, Lake Champlain Entertainment (Burlington, VT), also consults to Merit Industries.

Operators, on the whole, do not dispute that buying is down and that many of their colleagues are "coasting" on older equipment. George Smith of Namco CyberTainment told VT: "For the last few years, various segments of the industry have been able to ride out existing profit margins. The street operator didn't have to buy an awful lot of equipment; he could live off countertops and golf games without huge investment. Most arcade operators have also survived with a large installed base of equipment."

The issue of operator investment recently received a sharp nudge in VT (Dec. 2002) in a column by Frank Seninsky of Alpha-Omega Group. "Manufacturers in our industry are suffering from the misconception that operators should buy a new game if it earns well '," Seninsky wrote. "The operator, however, uses a different rule of thumb. Does the game increase overall location revenues, or does it simply transfer money from the other machines on the same site?"

Seninsky's idea provoked some decidedly unhappy feelings among more than one equipment manufacturer. "If operators aren't going to support us, what are we in this business for?" one company president pointedly asked VT. "It seems like many operators are looking for excuses , any excuse , not to buy new product."

This manufacturer told the following story, which could doubtless be repeated by other amusement machine makers:

"At a recent trade show, we introduced a new machine and were initially delighted with the response. Operators who visited our booth said they really, really liked it. So, I asked one operator: how many units do you think you might buy from your distributor? His answer floored me: none. I said, none? The operator explained: 'If I buy a unit for one location, all my other locations will want one. I might have to cover my entire route.' Well, for goodness sake, from a manufacturer's point of view, that is the whole idea. You cannot sustain a company or an industry this way."

Another manufacturer told VT: "We have repeatedly introduced a new game, put a prototype out on test, and proved to the operators with their own dollars and cents collection data that the machine was very profitable. But sales were less than a third of what we expected and believed was reasonable."

According to Seninsky, however, there is a good reason for stiff operator sales resistance in such cases. He suggests that operators and manufacturers have completely different views of what constitutes a successful game. From an operator's point of view, he said, the cashbox of an individual game is not the proper yardstick. Operators utilize the criterion of whether a game adds to a location's overall revenues.

"Manufacturers need to concentrate on creating new machines that bring in new business," Seninsky said. "Otherwise operators don't need to buy it, and they will put off buying it, or simply won't but it."

Operators also frequently answer charges of under-investment by saying (a) they would buy more equipment, if there were more good equipment to buy; but (b) there is not enough good equipment to buy. George McAuliffe of Pinnacle Entertainment Group (St. Louis, MO) put it this way: "There are not enough good games on the market now'The trend of today's operators only buying equipment when they are 'forced to' is understandable. But it can't go on forever. I wish there were more good, affordable equipment for us to buy."

When operators are pressed further on the question of investment, they readily admit that new equipment purchases are vital to keeping revenues high on routes and in fun centers. Jack Cohen, president of the International Association for the Leisure and Entertainment Industries and owner of Safari Sam's (Cranberry Township, PA), put it this way: "If we remain at par as we are now, we'll get what we have now: flat results. The way to create growth is to offer new attractions."

Powerful evidence supports the notion that the industry's best operators sincerely desire to acquire more "good" equipment, however that term is defined. Consider the fact that some locations today actively create their own games. According to consultant Randy White, White Hutchinson Leisure & Learning Group (Kansas City, MO): "The Chuck E. Cheese chain of kiddie fun centers is having its own games developed. They are their own market with over 400 stores."

Namco's George Smith predicted that in the coming years, he expects to see increased competition for leisure dollars as Americans are offered an ever-expanding choice of leisure and entertainment options. This increased competition will force operators to increase their investment outlays in new attractions, he said, if they want to survive.

This dynamic may already be happening, according to Lake Champlain Entertainment's Myers. Although many street operators can survive , and are surviving , without buying very much brand new equipment these days, he asserted, market forces are now pushing every operator into a stark choice: either upgrade steadily, or eventually sell his routes.

On the question of whether operators are under-investing or investing adequately, we'll give the last word to Namco's Smith. In a remark that may show Solomonic wisdom, he told VT: "Ultimately, both sides are right."