Industry isn’t facing slots of fun

Analysts said this month the replacement market — in which slot machine manufacturers sell casinos newer games to change out older products — has fallen from previous estimates.

Eilers Research founder Todd Eilers said slow demand from casinos in the United States and Canada through June could result in a 28.6 percent decline in North American slot sales for all of 2014. He lowered his 2015 projections by 6 percent.

Buckingham Research Group gaming analyst Brian McGill didn’t change his sales estimate for 2014, but he lowered his 2015 prediction by 5 percent.

He said delays in new casino openings, particularly in Massachusetts and Philadelphia, were to blame.

“This is especially worrisome because we do not anticipate the 2015 total will move higher over time,” McGill said.

Meanwhile, six casino closings this year contribute to the sales reduction.

Eilers said 9,675 slot machines will have been taken out of commission by the end of the week.

On Tuesday, Trump Plaza becomes the fourth casino to close in Atlantic City. Margaritaville in Biloxi will become Mississippi’s second closure Friday.

Caesars Entertainment Corp. controls more than 3,600 of the silenced slot machines. The company closed Harrah’s Tunica in Mississippi in June and the Showboat Atlantic City was shut down Aug. 31.

Many of the slots could be redeployed to other Caesars casinos, and Eilers said manufacturers could try shipping up to 40 percent of the remaining slot machines to U.S. casinos.

Many of the games have a lot of wear and tear. Others, such as the 2,200 machines from Revel in Atlantic City — which closed after Labor Day — are practically new.

Some of the slots “will be destroyed, as they are too old, or shipped into international markets,” Eilers said.

Suppliers will try to redistribute leased machines, which they own but share revenue with the casino.

The slot machine sector’s depressed outlook is inopportune.

Slot machine manufacturers have spent millions of dollars to develop and display their newest games at the Global Gaming Expo in Las Vegas, which opens in 15 days.

Also, the manufacturing sector is consolidating.

Scientific Games Corp., a New York-based lottery provider, which bought WMS Industries last year for $1.5 billion, is spending $5.1 billion to acquire Bally Technologies. Last year, Bally bought gambling equipment manufacturer SHFL Entertainment for $1.3 billion.

Meanwhile, Italian lottery giant GTECH Holdings is buying International Game Technology for $6.4 billion in the gaming industry’s largest deal in almost 10 years.

Both mergers are expected to close in early 2015.

Last week, Global Cash Access announced it was buying Multimedia Games for $1.2 billion.

Analysts say the deals will strengthen and change the prospects of the slot machine companies by furthering development of new game titles and technology. Meanwhile, the channels to place existing games will grow. Scientific Games and GTECH are both primarily lottery companies.

Merging with GTECH should invigorate IGT’s prospects.

McGill told investors IGT’s business “remains in a free-fall.” The company continues to lose game sales to smaller manufacturers, such as Multimedia, Konami Gaming, Aristocrat Technologies and Ainsworth Game Technology.

“Our checks really couldn’t come back much more negative on the outlook for sales for (IGT),” McGill said. “We expect that IGT will continue to see a share loss going forward, which should create an opportunity for the combined Bally-Scientific Games and Multimedia Games.”

McGill said previous acquisitions by Scientific Games and Bally will benefit the combined company formed by the merger.

Earlier this month, Bally announced a deal with the Ontario Lottery and Gaming Corp. for a gaming management system to oversee slot-machinelike lottery games in the Canadian province. The transaction, for which financial terms weren’t disclosed, was announced in 2011 but was delayed over political issues.

“This deal could also calm some fears about a falloff in Bally’s systems business as it represents a major new customer which should help fill the void left from the conclusion of (other large-scale projects),” Eilers said.

The slot machine makers’ biggest challenge is finding new markets.

McGill said casino expansion efforts appear dead in Kentucky, Florida, Illinois and New Hampshire. Colorado is considering a constitutional amendment to allow slot machines at racetracks.

“We think it would be a long shot to pass,” he said.

Massachusetts eventually could house 9,000 slot machines unless a referendum seeking to overturn the state’s casino expansion plans passes in November.

McGill also is watching casino expansion developments in New York, which is looking to add four casinos upstate. As for Philadelphia, Pennsylvania gaming regulators might award a final casino license by year’s end. The matter has been debated for almost two years.

Many analysts see little hope for improvement.

Tough market conditions will hurt slot machine sales, reduce the number of new casino management systems and shrink the revenue shared by casinos and manufacturers from participation games.

“In our opinion, it is difficult to see significant upside in terms of revenues across the industry for anyone,” McGill said.

Howard Stutz’s Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Follow on Twitter: @howardstutz.