FY16 State of the Industry: VLTs

In fiscal 2016, the eight U.S. lotteries operating video lottery terminals (VLTs) generated $6.4 billion in net machine income (NMI), an increase of 4% over the previous year, according to La Fleur’s Fiscal 2016 VLT Special Report. In comparison, U.S. lotteries’ traditional lottery sales increased 3% to $67.3 billion.

In Canada, traditional lottery sales increased 15% to C$9.2 billion. Growth was similar in the gaming sector. The five Canadian lottery operators’ net machine income increased 4% to C$2.5 billion in fiscal 2016. (Alberta Gaming & Liquor Commission’s NMI data reflects fiscal 2015 figures as the agency’s fiscal 2016 annual report will not be published until mid-November). Four of the five Canadian jurisdictions reported an increase—positively reflecting multiple jurisdictions’ modernization programs of completing a province-wide replacement of their VLTs.

The five video gaming device (VGD) jurisdictions in Illinois, Louisiana, Montana, New Mexico and Pennsylvania generated $4.6 billion in net machine income in fiscal 2016, up 5% over fiscal 2015. (The lotteries in these states are not responsible for the regulation and management of VLTs.)

Rocket Launch

The state of the mature VLT industry resembles a rocket launch—just like NASA spent decades to send a man to the moon, the North American lottery industry has invested decades into boosting VLT jurisdictions into the sales stratosphere.

“I see it like a rocket that has just cleared the top of the launch pad. There has been a huge amount of work to get the industry to this point and the giant is starting to get some serious momentum,” observed John Myers, Acting Director, West Virginia Lottery. “New technology is developed almost daily that will allow us to pilot where we want to go and to travel at faster and faster speeds. As the market reacts to new players with expectations of social based entertainment and shorter game life, we will have the technology base to meet those requirements.”

But the support community for the VLT rocket launch has changed hands. “With the major vendor mergers over the past couple of years, the wide area VLT vendor community has significantly shrunk,” said Barry Pack, Director, Oregon Lottery. “It appears that some traditional casino vendors as well as new vendors are ramping up to break into the VLT market. Major upgrades across wide area networks in North America are largely complete and future procurements of new hardware will likely be smaller and more consistent over time. Sales appear to be largely flat, with some declines across North America, indicating maturity in current product offerings, as well as that the millennial player remains elusive to the VLT market at this time. While there are new innovations seemingly on the horizon with skill based gaming, mobile gaming, sports wagering, etc., much of the VLT industry will likely remain cautious in their efforts to adopt these technologies as regulatory issues are worked through.”

Still the expansion of casino gaming in the United States will keep innovation up. “While the number of VLT companies is decreasing due to several recent mergers, the demand for VLTs remains strong with the ongoing development of new casinos in all areas of North America,” observed Gerald Aubin, Executive Director, Rhode Island Lottery. “The industry is solid, and the mergers should allow for quicker technology advancements with the companies’ combined talents and experience.”

The state of the mature VLT industry also resembles a river—the revenue from the profitable VLTs keeps flowing to state governments but occasionally Mother Nature can cause havoc, as it did during Hurricane Matthew.

“VLT jurisdictions continue to provide a constant and reliable flow of revenue to their respective governments,” reported Jim Logue, Assistant Director, Video Lottery, Delaware Lottery. “Despite the increase in competition and slow recovery of the economy, these agencies remain an important and valuable source of funding in support of government programs and continue to be a vital asset to the continuation of government operations. In an industry that continues to grow, with some regions appearing to be at or near saturation, the maturity and stability of VLT jurisdictions should result in continued profitability for years to come.”

Skill-Based Games

What is most striking is how technology is transforming the world of VLTs. “The equipment and play styles are evolving rapidly from the reel-based themes into interactive, three-dimensional, and multi-player concepts.  The industry is undergoing some technical updates,” said Constance Miller, Deputy Director, Operations, Ohio Lottery.

Manufacturers and operators are keen to utilize skill-based technology in their games if regulations can be improved. “Machine manufacturers have put a lot of research and development into games of skill over the last several years,” observed Delaware’s Logue. “These games will certainly have a place on our floors hopefully in the near future; however, you won’t see them dominating the game mix in any particular casino anytime soon. I believe these machines will be rolled out rather slowly and confined to a smaller footprint on the floor as operators gauge their acceptance and popularity among players. These games are geared to a younger demographic who typically don’t play VLTs so it will take some time before they realize these games exist and they decide whether or not they are something that interests them.”

The allure of the elusive millennial is the main attraction. “VLT jurisdictions have struggled to appeal to a younger demographic and the ability to introduce skill-based technologies would help bridge this gap,” stressed Oregon’s Pack. “Although not likely the silver bullet, it would certainly add a new twist to appeal to a new market. It would likely be a cautious adoption, but certainly would be of significant interest if regulations allowed it.”

West Virginia’s Myers added that millennials “have already shown their propensity to play these games and will demand it. Most millennials and the generation coming behind them are ‘digital natives’ who never experienced the world without computers. The technology alone is commonplace to them and entertainment will have to consist of skill based activity and competing against others or even their best previous score.”

Rhode Island’s Aubin also agreed that skill-based VLTs could be popular “especially with the younger generation who have grown up with skill-based games.”

But Ohio’s Miller observed that “the definition of games of chance and games of skill is still relatively unclear. If a player makes a choice, does that remove chance, or is it still primarily chance. I think until some of those items are clarified, the movement to those games will be slow.”

Maturing Industry

The oldest VLT jurisdiction in the United States—South Dakota Lottery—just turned 27 years old in 2016. VLTs commenced operation in South Dakota, in October 1989. In fiscal 2016, VLT net machine income increased 4% to $207.6 million.

The second oldest jurisdiction—Oregon Lottery—is 24 years old. It was part of a three-state blitz that launched VLT operations in 1992 over a six-month period. (This also included West Virginia and Rhode Island.) Two of these three jurisdictions expanded into table games. Two of the three operate VLTs at racetracks, known as racinos.

The Oregon Lottery ranked number two among U.S. VLT jurisdictions in percentage growth. In fiscal 2016, Oregon Lottery’s VLT net machine income climbed 10% to $876.5 million. This represented an increase of $75 million.

“While improved economic conditions contributed to the sales growth in 2016, the continued effort of replacing obsolete equipment (with the Bally V32 VLT deployment) and increased marketing efforts also helped push sales to near historic levels,” reported Pack. “In addition to positive year-over-year sales, video lottery also achieved the following milestones in 2016:

– The second highest sales year in product history

– Largest year-over-year gain in the last nine years

– First $20 million sales week ever

– 22 weeks with $17 million or more in sales. There were only 13 in the prior seven years.”

West Virginia Lottery launched operations in June 1992. The lottery’s top revenue producing year was $1.37 billion in fiscal 2007. In fiscal 2016, combined VLT net machine income declined 3% to $903 million from $935.1 million.

“In our case the largest cause of decreasing revenues at our casinos was competition,” said Myers. “Several new casinos have been built in surrounding states over the last five years as states continue to search for new revenue streams. A reduction in disposable income resulting from a declining oil and gas market and a severely reduced coal industry has negatively impacted revenues from our limited video lottery (bars and taverns) product.”

Both VLT operations at racetracks and limited video lottery (LVL) terminals took it on the chin with a 3% decline for both forms of gaming. In fiscal 2016, the West Virginia Lottery’s net machine income at racinos totaled $537.7 million compared to $360.8 million for LVL terminals.

The Rhode Island Lottery also was impacted by gaming competition from neighboring states. In fiscal 2016, VLT net machine income dropped 5% to $488.7 million from $516.3 million.

“Rhode Island experienced a slight decrease (although much less than had been predicted) year over year due mostly from the new casino in Massachusetts, which issued unprecedented amounts of ‘Free Play’ to players,” said Aubin. “The casinos in Connecticut also increased their Free Play amounts, making it a player’s market with casinos offering more gifts, comps for food, shows and many promotions to attract players.”

The Delaware Lottery—the fourth oldest VLT jurisdiction—experienced 1% growth in fiscal 2016. Unaudited FY16 VLT net machine income totaled $354.1 million.

“There were no new casino openings in the surrounding jurisdictions during this time and that allowed for a slight period of stabilization for us,” explained Logue. “However, expansion in the region will continue with the opening of the new MGM National Harbor in Maryland near the end of the calendar year and expansion of existing properties in Maryland, specifically at Maryland Live in their attempt to counter any losses they may expect as a result of the MGM opening. Approval has also been given for a new casino in Philadelphia. These new casinos and casino expansions will compete directly with our facilities here in Delaware and will likely result in further reductions in future net machine incomes.”

The New York Gaming Commission’s VLT net machine income increased 4% to $1.99 billion in fiscal 2016, up from $1.9 billion in fiscal 2015.

The Maryland Lottery is the second newest VLT jurisdiction. VLTs commenced operation in 2010. In fiscal 2016, Maryland Lottery’s VLT net machine income increased 9% to $741.7 million, up from $681 million in fiscal 2016.

“Fiscal 2016 was our first full year of operation for all five existing casinos,” reported Charles LaBoy, Managing Director, Gaming, Maryland Lottery. “The good economy coupled with continued development by properties of their marketing and promotional programs also appear to be driving the year over year positive results.”

The Ohio Lottery is the youngest VLT jurisdiction in the U.S. Operations began in June 2012. Today, the lottery operates VLTs at seven retail sites. Ohio led all U.S. lotteries with a 12% increase in FY16 VLT net machine income, which totaled $868.9 million.

Canadian Performance

In Canada, Atlantic Lottery Corp. (ALC) ranked first in growth with a 10% increase in VLT net machine income. In fiscal 2016, it totaled C$433.3 million, up from C$393.1 million in fiscal 2015.

Manitoba Lotteries Foundation ranked second with a 4% increase in fiscal 2016 VLT net machine income. It totaled C$334.6 million.

Société des etablissements de Jeux (a subsidiary of Loto-Québec) reported a turnaround, with a 1% increase in fiscal 2016 VLT net machine income. It totaled C$902.2 million.

FY17 Plans

The expansion of gaming in Maryland continues in fall 2017 with the highly anticipated launch of the MGM property. There will be reverberations felt both within the state as well as outside its borders.

“While we believe that the MGM National Harbor casino will grow the market, there will be a shift in market share that will be felt both within Maryland and in the surrounding states,” said Gordon Medenica, Director, Maryland Lottery & Gaming Control Agency. “We expect MGM National Harbor to draw heavily from Virginia and D.C. For all the saturation in the Northeast, we are fortunate to be on the southern boundary of that saturation, with a large underserved market in Virginia and D.C.”

Oregon Lottery recently went live with a new Video Lottery Gaming System. Pack said the lottery “will be focusing on converting its nearly 12,000 VLTs to the G2S protocol in FY17. However, Oregon has been working with its current vendors to bring a licensed property game to a multi-game product, and continues to challenge vendors to deliver innovative content. A solicitation will also be issued in FY17 for additional new VLTs and content, which will be open to both current and new VLT vendors.”

Rhode Island Lottery organizes an annual performance evaluation period for the VLT vendors. Aubin said “this provides vendors with a possible increase/decrease in their machine allotment based on performance. We also have a marketing initiative program, which requires a minimal investment by the vendors on new games, signage, etc. These two programs result in vendors consistently submitting new games for testing, including the interactive games with multiple bonus features and with an eye toward the possible implementation of skill-based games.”

The legislative environment in West Virginia is frequently changing. Myers said this “requires constant monitoring to meet future customer demand for product offerings. Testing and approving new concepts to keep our VLT operations competitive is high on our list.”

In Delaware, the lottery will be proactive to test new concepts. Logue said it is entirely possible that the lottery will be seeing some of the concepts exhibited at G2E in Las Vegas “near the end of FY17 so we will be testing whatever the manufacturers are able to provide as soon as they are offered.”

FY16: Top 3 VLT Games

Delaware Lottery

Fu Dao Le games (Scientific Games)

Game of Thrones (Aristocrat)

Lightning Link (Aristocrat)

Maryland Lottery

Pure Diamond (Aristocrat)

5 Dragons (Aristocrat)

Double Gold (IGT)

Ohio Lottery

Quick Hits (Bally)

Wonder 4 (ATI)

Wheel of Fortune (IGT)

Oregon Lottery

Big City 5’s (IGT)

American Original (Bally)

Prince of Thieves (IGT)

Rhode Island Lottery

China Shores Boosted Win (Konami) (under IGT in RI)

Stinkin Rich (IGT)

American Original (Bally) (under IGT in Rhode Island)

West Virginia Lottery

Triple Diamonds (IGT)

Stinkin Rich (IGT)

Triple Blazing 7s (Bally)

2016-11-29T22:09:17+00:00 November 14th, 2016|