January 2007, it was a glorious time. The stock market was coming off a 14% gain in 2006. The credit markets were wide open. IGT's stock almost reached $50, a near double in a little over a year. Optimism was effusive. SBG (that's Server Based Gaming for those of you who've forgotten already) was going to revolutionize the slot business and spark another massive replacement cycle, mostly to the benefit of IGT. Investors ignored IGT's declining market share and lack of actual, concrete visibility on the timing of SBG.
Fast forward to the present and SBG discussions are nowhere to be found. IGT's stock has plummeted to $13.60. Market share degradation and a lack of replacement demand dominate the IGT discourse. We think we've found reason to change that discourse. As we wrote about in our 5/15/09 note, "IGT: MGM, CREDIT MARKETS, AND REPLACEMENT DEMAND", the improving balance sheets of the operators should expedite the re-acceleration of replacement demand. This note focuses on our old friend SBG and its potential impact on market share.
Conceptually, it makes sense for casinos to want the ability to extend the functional life of expensive hardware and only "replace" the software. The flexibility afforded the operator in terms of game and denominational choice should be a revenue driver and a cost cutter. I don't know when and how deep SBG will penetrate casino floors. I do have some thoughts on the impact of SBG on market share, however.
SBG could be a positive for IGT's market share. In a SBG world, an IGT game will only be downloadable to an IGT box, a WMS game will only be downloadable to a WMS box, etc. If I'm a casino operator, do I want to give more of my casino floor to a niche, hit-driven game developer such as WMS? That is a risky strategy given the lack of breadth in that company's game library. With IGT, I know there'll always be some "hot" titles and some "not so hot". There will be more frequent game introductions from IGT. In other words, the casino probably doesn't want to lock into a niche developer for more than a niche floor share. This should have the effect of at least stabilizing IGT's share and probably increasing it, as the bill acceptor and ticket-in/ticket-out technology changers did in the years prior.
SBG remains a long-term positive catalyst for the industry. We haven't addressed all of the reasons why, such as higher margins, lower capital intensity, more consistent revenues, etc. which will benefit all of the slot technology companies. In terms of market share though, SBG should favor the big guy.
