The computer industry has gone through a series of business models. In the early days, when mainframes roamed and there were no PCs, the mainframe, software and services came in a single bundle from IBM and the seven dwarfs—Burroughs, Sperry Rand (formerly Remington Rand), Control Data, Honeywell, General Electric, RCA and NCR. This was the model used by companies such as Wang Laboratories, which was founded in 1951 with $600 seed money, and began manufacturing computer hardware and software in the mid-1960s.
During the 1970s, Wang Laboratories dominated the word processing market; that is, until the PC came along. With the help of outsiders developing thousands of word processing applications, such as Wordstar in 1979, the closed-system developed Wang word processor was soon knocked out of the market. This started the decline of Wang Laboratories. In 1986, the company had 30,000 employees and sales of $3 billion, which declined to $1.9 billion by 1992, when Wang posted a net loss of $139 million and went under Chapter 11 bankruptcy protection.
The advent of the PC also destroyed hardware-software-services packaging and ushered in a business model under which customers could choose hardware, software and peripheral offerings from hundreds of vendors. Microsoft developed the new original equipment manufacturer (OEM) model under which software (Operating System and BASIC) was again bundled with the computer; the company later added application software, such as MultiPlan (a predecessor of Excel), to this bundle at a low price. This helped Microsoft grab market share and shut out its competitors.
Next came the business model under which applications were packaged into suites. Microsoft put together MS Office and got rid of "best of the breed" software such as Lotus 1-2-3, Wordstar, and dBaseII.
This was followed by the model invented by Netscape, which basically sold the server. The market share went sky high since the price was low (free) and the software was just a download away. Microsoft counteracted by adding Internet Explorer to Windows, which spelled the end for Netscape. Hotmail, meanwhile, started another business model under which free e-mail service was provided, with revenue generated through advertisements embedded in e-mail messages.
As the software industry went through these business models, the problem of upgrading hardware and software frustrated users, which brought in the Application Service Provider (ASP), followed by Software as a Service (SaaS) model.
The software industry has gone through periods of growth and decline and has now become an integral part of society—and a very big industry. Total software revenue is projected to reach nearly $300 billion in 2010, exponentially up from $75 billion in 1995. (See Figure 1.)
But what exactly does this have to do with gaming?
With the expansion of the gaming industry throughout the United States, the Gross Gambling Revenue (GGR)—equal to the amount wagered minus the players’ winnings—has steadily increased over the years, making gaming a sizeable industry.
Figure 2 shows the growth from 1995 to 2007 both in commercial casino industry and in gaming as a whole (pari-mutuel wagering, lotteries, casinos, legal bookmaking, charitable gaming and Bingo, Indian gaming, and card rooms).
In U.S. casinos, slot machines occupy more than 80 percent of casino floors and produce 70–75 percent of gaming revenues.1 This means manufacturing slot machines is a big business—a business that appears to be following the early models of the computer industry. There are hundreds of different slot machines, yet just a handful of major slot machine manufacturers. It is extremely difficult at this time for a third party to get a slot game to market.
Back to the Future
During 1996 World Gaming Congress & Expo in Las Vegas, John Acres addressed a group of representatives of the industry’s largest equipment suppliers about organizing the industry’s manufacturers to reduce technological communication problems. In May 1998, the Gaming Manufacturers Association (GAMMA) was formed as a nonprofit organization to pursue this goal. Membership was later extended to regulatory advisors and other affiliate organizations that share the technical vision of promoting open standards, and GAMMA came to be known as the Gaming Standards Association (GSA). We believe GSA’s work will open up the business of game designing and manufacturing to a wider audience, and bring fresh ideas to the industry.
So, the big question is now: What will the gaming industry look like in the future?
We believe that, like the computer systems providers of the early 1990s, many of the big players in slot machine manufacturing today will reshape themselves and thrive in years to come. The biggest change in the computer systems industry was the emergence of new players, and we believe the same will happen in the gaming industry. Just as companies such as Microsoft, Oracle and SAP emerged as new players providing mainly software, and companies such as Dell, HP, Sun and Silicon Graphics emerged as new providers of hardware, if we are right in our assessment, there will be new players in the gaming market as well.
Changes are already taking place—CityCenter, the $9.2 billion, 4,000-room MGM Mirage/Dubai World casino hotel project expected to open in 2009, will be wired for the slot machines of the future. According to an April 29, 2008, Las Vegas Sun report, CityCenter will not have thousands of free-standing slot machines with hard-to-swap-out computer chips like today’s casino floors; instead, it will be house networked slot machines that are connected to a server in a back office. These server-based slot machines will allow players to select a game from a large menu, order drinks, print show tickets and participate in progressive games. Casino managers will also be able to change the games with the push of a button and easily optimize the casino floor.
Just like in the computer industry, many technical issues had to be resolved to facilitate the creation of a casino floor with server-based machines from different manufacturers. Slot manufacturers had to share protocols and specs so their products could function on a single network. Ed Rogich, vice president of marketing for IGT (the manufacturer MGM Mirage chose to develop the computer server system at CityCenter) told the Las Vegas Sun: "This is probably the most cooperative we’ve been in the industry. And we’re doing this because we all realize this has great potential for our futures."
Likewise, in a May 28, 2008, Morningstar.com article, analyst Bradley Meeks said that downloadable technology "has the potential to revolutionize the gaming environment, causing other new casino properties to install similar systems."
Other casinos are also getting ready for the slot games of the future. IGT has been testing server-based systems at Barona Valley Ranch since 2004. Pechanga Resort & Casino has been retrofitted with a large-bandwidth system capable of handling 4,300 networked slot machines. Game manufacturers, meanwhile, are investing heavily in R&D for server-based products. IGT, with a market share of more than 60 percent of all casino floors in United States, is spending about $50 million each quarter on R&D for server-based gaming machines; WMS spent $49 million and Bally Technologies $45 million in this area in 2006.
According to veteran gaming industry consultant Bart A. Lewin: "Slot machines will provide a standard hardware platform providing processor(s), video, sound and player tracking capabilities. This will not only allow a multitude of game designers to build games, but I also envision the creation of high quality game development tools and software components that have been pre-approved by regulators. This could greatly decrease the amount of time it takes for a game to come to market for anyone utilizing these tools. I also envision players being able to sort of construct their own game from prefabricated widgets while in front of the machine—all of which can be saved as preferences on their player tracking account."
Lewin also expects the slot machine industry to follow another industry that has evolved greatly over the past few decades—video games, with slot machine titles resembling Xbox 360, Wii and PlayStation games.
The Future is Now
In an April 12, 2007, note to investors, Deutsche Bank gaming analyst Bill Lerner had this to say: "Although general concerns remain with respect to the timing of server-based gaming, as well as the industry’s commitment to it, we believe that it is both on track and is well embraced … The industry is on track for widespread server-based gaming implementation in 2009, and likely contributing materially to earnings of gaming equipment supplies beginning in mid-2008 as the replacement cycle heats up."
With the midway mark for 2008 just freshly passed and 2009 mere months away, we believe it may be time to take yet another cue from the computer industry to ensure the continued success of the gaming industry. If we applied the Manifesto for Agile Software Development (http://agilemanifesto.org)—which states that software developers should value individuals and interactions over processes and tools; working software over comprehensive documentation; customer collaboration over contract negotiation; and responding to change over following a plan—to the business of game development, hopefully no gaming manufacturer in the future will be forced to go the way of Wang Laboratories.
Footnotes
1 Robert C. Hannum and Anthony C. Cabot (2005). Practical Casino Math, 2nd Edition, Institute for the Study of Gambling and Commercial Gaming Publication, Reno, Nev.
Dr. Ashok K. Singh has taught statistics, mathematics and operations research courses at New Mexico Tech, Socorro, N.M., and statistics and mathematics courses at University of Nevada, Las Vegas. He has more than 75 publications in theoretical and applied statistics.
Andrew Cardno is an established thought leader in business analytics with over 16 years of experience working in business analytics and working with organizations on how to get the most value from large complex data sets. His experience ranges from modeling health care drive times through to casino gaming floor analytics.
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