I'm still reflecting on my Japan experience at Jamma in September. It has made me look differently at our industry in the U.S. and helped me understand the transition that is occurring. I maintain that our industry is going through an evolution, and has been going through this evolution for years, except that every year the change occurs at twice the rate of the year before, and so on and so on.... This is also how technology and international trading has affected our industry. Technology is not a "linear" (straight-line) evolution, it is an "exponential" evolution. This has always been the case in our technologically driven industry. Accelerating all of this is the international boarder crossing by all segments of our industry. It wasn't that many years ago that you couldn't get from here to there. Today, we do business with foreign countries as if they are across town. The reality of foreign trading is that it isn't a level playing field, yet. Boarders are not open on a reciprocal basis. The U.S. is very open, while most other countries are not. For example, Chilton Vending bought more of Williams' Cruisers than the whole country of Japan. Williams sold six Cruis'ns in Japan. In the long run, all of this will have to work itself out.
Is that clear? OK, not totally to me either. We'll leave the technology conversation for those that understand it. Let's stay with the "internationalization" of our industry.
Here is an Americanized view of how I see the amusement industry in Japan. It is dramatically different than the U.S. For me it helps to see how the industry differs in Japan. The Japanese manufacturer produces the machine, and then they ship it to their "distribution" division, and then it goes to the same manufacturers "operating" division. The company that manufacturers it, also distributes it, and operates it. They place the machines in their own arcades, which they also own most of. For all I know, they may play their own games as well.
Sega, Namco, and two or three other Japanese manufacturers have over a 50% market share of the total operating business in Japan. If you're like me, you're saying, we'll that leaves 50% for the small guy. If the other 50% was worth having, the manufacturers would have that too. The competition for Operating is between manufacturers, not manufacturers and operators. It is a little like what we leave for the ants after the family picnic. All the stuff we really wanted is already gone.
Also very key to this equation is that the competition for the arcades in Japan is not river boat casinos, full scale gambling, keno, or lottery games on every corner, but rather Pachinko parlors. These Pachinko parlors are packed all day and night.. It is informal gambling. You play a boring game to amass little silver balls that you trade in for prizes. That's it. No blackjack, craps, roulette, nothing. This is key to the issue of why games earn so much more in Japan than the same games do in the U.S. The Japanese arcades are as popular in Japan as casino's are in the U.S. A deluxe video game in the U.S. street market may earn $500 per week. In Japan that same game may earn $2,000, or more, and be considered average.
This would be an appropriate time for me to mention that although I didn't go into every bar, I don't remember seeing one dart board, or coin-op pool table in Japan. They may be there, but not as you would find in the U.S. The traditional street business is not what I'm talking about. The arcades, from the big ones, to smaller arcades in bowling centers and theaters are affected by this industry change.
The Japanese companies are not owned by Americans. They are owned by the Japanese. I can only imagine the frustration the U.S. representatives go through trying to produce the results in America that the Japanese produce in Japan. Under current market conditions, it isn't going to happen. I'm sure that's not what the Japanese want to hear.
The result has been a general move over the years by the Japanese to increase their presence in the U.S. operating community. Most, if not all of the Japanese companies that sell in the U.S. also have an operating division in the U.S. These operating divisions have had very mixed results, especially when they have attempted to operate at the traditional street level. It has had the appearance of setting objectives without a plan. It may work in Japan, but in the U.S. there is this community of approximately 20,000 operators that have served this market successfully for decades. I'm not sure this segment of American operator is understood, or significantly respected by the Japanese manufacturers. Many of these American operators have developed some very deep and loyal relationships
with their location owners that are difficult to penetrate. You do have the locations that are awed by the quality, and quantity of equipment that a large manufacturer can offer, and many locations have taken advantage of them. Only to find out later that the service, and personal touch that their operator provided over the years is not as easily duplicated as was thought. At the same time, the new operator learned that the games don't earn near what was anticipated, and the new friends part ways, and is replaced by the previous American operator in many cases.
Where the Japanese have had success in penetrating the U.S. market is in the arcade market. The profitability of these arcades is open for debate, but there is no mistake that the Japanese are quickly taking over the arcade market in the U.S. I wouldn't look for this trend to subside anytime soon. I would expect additional chains to sell their operations to the Japanese operators.
It doesn't do any good for American Operators to complain. This train has plenty of steam, and although it has stalled occasionally, and will stall many more times, the trend is undeniable and unstoppable, even if you wanted to. Vertical integration is here to stay in our industry. I personally don't know how the American manufacturers have resisted the urge to follow suit and operate. My hat is off to them.
Every business opportunity goes from a bad deal to a good deal at some price point. If we accept that the Japanese manufacturers want more of their new equipment in American street locations, the way to achieve that goal is not to compete directly with the American operators, but rather to work with them, and jointly. I know that buying these $16,000 and up deluxe videos and placing them in my locations is generally a losing proposition for Chilton Vending. However, I can't deny that it is the equipment that my customers are requesting from me. It isn't really the customers problem that the arithmetic doesn't compute. They are the customers after all. Rather than the manufacturers becoming disappointed that the Operators aren't buying more, and then trying to compete with the operator on his own turf, the manufacturers and distributors should develop very aggressive programs for the street operator. Manufacturers and Distributors should work together to make available extended terms on equipment, prices should be decreased significantly, marketing programs should be offered, and risk sharing programs should be implemented if the manufacturers want to increase their presence in the U.S. street locations not by 10%, but 10 times. The market of players is still there. Arguably more players today than ever before. We as an industry are doing a poor job of getting to our customers the equipment they want to play.
On our route the formula hasn't changed. I need to pay for my equipment out of my share in one years earnings. That's the only way we can keep our doors open. That formula is working on fewer and fewer pieces of equipment in todays market. I suggest as an industry we stop the finger pointing and get on with the solution.