WILL GRAVITY PULL PRICES DOWN TO EARTH?

The price of the average slot machine has rocketed up 45% over the last 6 years. The advent of cashless gaming, new casinos and expansions, and strong consumer demand for gambling helped fuel an environment for the suppliers to aggressively raise prices. Higher prices, of course, translated into gross margins taking off. Gross product margin for IGT climbed over 9% over the same time period. Good times indeed.

The times they-are-a-changin’. The big guy, IGT, has lost a lot of market share and is starting to flex his muscles. Right now IGT’s power is confined to committing its balance sheet to more aggressively help its customers finance their slot purchases. This effort should buy some market share.

Where IGT could really leverage its low cost manufacturing would be in the pricing arena. It’s debatable whether this would be a good move for IGT, but there is no question the rest of the industry would suffer. IGT is in the midst of a cost reduction program which could offset some of the gross margin pressure from lower pricing.

An aggressive pricing strategy combined with better game development could allow IGT to regain some of its lost market share, which has been considerable. However, as we pointed out in our 11/24/08 post, “SHARING THE MARKET”, IGT’s market share has actually stabilized the last few quarters. I expect IGT to continue to redirect R&D towards game development.

IGT may have an opportunity here to steal share through pricing which, successful or not, would likely be detrimental to the industry.

Pricing and gross margins have been on a rocket ship