In a conversation with an industry veteran the other day, we found ourselves discussing the state of the industry this summer. He is uniquely qualified, having been in street and FEC operations for most of his career. He was pointing out the obvious: there is a lack of new equipment to choose from, which is not necessarily a bad thing...unless you're in the sector that produces the equipment. And when we operators say things like that, I can hear the small manufacturers cringe. As the innovators who keep the big companies on their toes, they have plenty of new products they are desperately trying to get in the marketplace.
My friend was discussing the state of the FEC industry, stating that this segment - which had been the "talk of the town" not so long ago - has more recently gone through a real downsizing, leaving the auction houses full of redemption equipment. Any operator who didn't see this FEC shakeout coming, would probably also not notice a 747 flying 50 feet over his head. Then my colleague began telling me that the street operator is the segment that is really prospering. At that, I felt the need to challenge him.
By definition, a street operator runs video games, jukeboxes, pool tables, dart boards, pinball machines and other miscellaneous coin-op equipment. You show me a street operator who says he's prospering in today's coin-op environment, and I'll show you an operator with video poker machines somewhere in the inventory.
If you're the guy out there who's running small routes, trying to buy the latest and greatest of the new equipment as it is becoming available...equipment that your customers are continually demanding...and you're NOT running video poker machines anywhere, God bless you. If this describes your operation and you're taking 10% or more to the bottom line, you're my hero. You should be writing this column, or a book, or teaching a business class at Stanford.
Most likely, if your small route doesn't include video poker, you are really challenged to make a profit every month. The fact is that the overall economies of the traditional street route, without video poker subsidies, hasn't worked well since Galaga and Ms. Pac Man were new. That is when the shakeout of the industry began...19 years ago! It has been continual. As industry economies become less attractive, the population of operators who are not in the video poker business is shrinking. In some states where video poker is clearly a legal activity, participation is a business decision. In others, where the shade of grey is a little darker, it's a personal decision. In still other states, it's a matter of survival.
I remember hearing the story of how Donald Trump decided to get into the gaming business. He researched Hilton Hotels and found that out of hundreds of properties, something like 90% of the total companies profits were being generated by the four Hilton casino properties. We are a gambling society. That's a fact, and there is no evidence that this is changing any time soon.
I remember two conversations I had, each over 15 years ago. Each one separate from the other, but similar in tone, from two very well respected industry veterans. (This is another one of those "educations" I received from fellow industry members at the Notre Dame AMOA school, after class in the hotel pub.) After explaining my business to them, they asked in total sincerity (actually more "concern" now that I think about it): "How do you make any money doing that?"
Gee, all we had was one of the most well known and well-respected small routes in the Midwest! I remember I got this numb look in my eyes, as I knew these two men knew something I did not. I spent years reflecting on their comments. You see, our Kansas company never owned a traditional video poker machine. We bought a couple for amusement only and that proved to be a total waste of time.
My two friends were right. We were a profitable company, but as business author Michael Gerber pointed out, the efforts we were putting into the business exceeded the profits we were taking out. We were being under-compensated for our efforts. Hence, we sold our business.
There are clearly industry companies doing well. I work for one of them. But then, the vast majority of Sugarloaf revenues and profits are derived from skill cranes. Other companies that I see prospering have very specific niches, while some have very successfully diversified into other industries, whether it is vending, home recreation retail, etc...One operator I know diversified into the manufacturing of gaming equipment and was tremendously successful.
I can't even imagine what's going to happen to the industry in South Carolina if (as ordered by the State Supreme Court) they actually have to remove their video poker machines July 1. By the time you read this, it will have happened or not. Put me on the record as someone who thinks the well-organized operators of South Carolina have a last-minute plan to prevent this action. If they do become a state without video poker, it will become a remarkable transition to traditional street operating that the vast majority of operators will be unable to make.
Back to my friend who got me started on all of this... I proceeded to
tell him that, if should I have a next life, I may very well be a member
of this industry again. But I won't be writing a monthly column. I may not
even get a Social Security number. I will get a pick-up truck, four Cherrymasters,
and be on my way.