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Everyone seems to offering the same rhetoric about replacement demand but a closer look reveals some interesting developments 

It’s probably fair to say that the consensus at G2E and the investment community is that replacement demand is likely to stay stagnant - 18 years - for the foreseeable future.  Never mind the math that shows replacements bottomed out in 2008 or that the physical life of a machine is on average no more than 12-13 years.  Interestingly, while suppliers are outwardly espousing the same rhetoric, internally, they are all cognizant of the fact that the 2 major subsectors of the slot market –video poker and 3 reel mechanicals – are older, fully depreciated, on platforms that are no longer supported, and have waning performance.  Dare we say that, despite the conservative rhetoric to investors, a few suppliers are gearing up to replace this aging base of machines?

We touched on this topic in our note, “G2E TAKEAWAY” (10/06/11).  For the first time in a long time, IGT had new video poker products on display at G2E.  IGT has an install base of 130,000 video poker machines – 100,000 of which are on the old 8960 platform – which to our understanding is about 9 years old.  WMS was also making another foray into the video poker market with a product that should be commercial in about 12 months.  Could this be a coincidence?  We think not.  Of course, the high likelihood of IL coming online doesn’t hurt either.

3 Reel spinners are the other oldie but goodie market garnering a lot of attention (not investor attention) these days.  Mechanical spinning represent roughly 30% of the total slot market in the US with 3 reel spinners being the older product.  IGT believes that they have about 130,000 3 Reel Spinners out there today, making up the majority of their total spinner product.  Given the vast install base, we’re not sure how old their install base is but we’re pretty sure that it's over 5 years old.  IGT has a new 3 Reel, one line product out – also targeting the Australian market – 36% of which is comprised of old 3 reel product.   IGT also has some neat features on its MLD platform which it hopes will garner some of the share of 3 reels being taken out.  

BYI’s has confirmed that there are about 35-40,000 legacy S-6000 high denomination, 3 Reel Spinners that are basically approaching obscelence.  BYI is hoping to replace some of those units with its new Pro-Curve cabinet. 

Konami agrees that the 3 Reels out there are old and in need of replacements but hopes that most of the new products gets replaced with video product. After many failed attempts to penetrate the spinner market, Aristocrat is out with a new hybrid stepper that also hopes to grab a share of the maturing market.

We expect to see the incumbents offering deep discounts on very expensive ‘retail’ price tags on new cabinets – mostly in form of trade-ins in order to garner as large of a share of any replacements that occur.  New entrants should also benefit as this will offer operators a chance to diversify their existing floors.  IGT is really the only video poker player to speak of, although the roll off of their Moody patents over the next 2-3 years should spur more competition in the sub-segment of the market.  IGT, followed by BYI, are the manufacturers behind almost all of the legacy spinner product installed on casino floors today.  WMS entered the spinner market with their transmissive reels about 5 years ago and ALL has never been able to get traction in spinner segment from past attempts. 

Bottom line: while the perception is that there is only a small replacement market to speak of, there are some pretty hungry bears out there chomping at the bit.  Of course the easiest solution to aging machines is simply a refurbishment, but we’re pretty sure that if manufacturers have any say in the matter they will use this as an opportunity to force replacements.