Slot Manufacturer WMS

WMS Industries Inc., once a top slot machine manufacturer, Tuesday won renewed respect from Wall Street as it prepares to debut a new line of games at Global Gaming Expo Sept. 16-17 in Las Vegas.

J.P. Morgan Securities Inc. initiated coverage with an overweight, or buy recommendation, predicting a six-month appreciation of 37 percent to $24 a share.

“WMS is emerging from two years of self-imposed exile as a manufacturer of gaming devices,” J.P. Morgan said in a research note distributed to investors.

“Prior to FY01 (June), WMS had an 18 percent share of the slot market and dominated the video segment. Lack of system integrity allowed customer cheating in 2001 and led to WMS’ market share plummeting to nearly zero in FY03,” the investor advisory said.

Also, Deutsche Bank upgraded shares of WMS to account for the “company’s near-term re-emergence from its technology improvement program and move toward a commercial launch of its next generation operating system and cabinet.”
“Based on conversations with our regulatory contacts, WMS is on track to receive the approvals they need to start placing its products on slot floors in September or October,” said Deutsche Bank analyst Marc Falcone.

“We expect WMS to arrive at G2E with ‘guns blazing.’ It is our anticipation WMS will show at least 40 new titles,” he said. Early indications suggest slot floor managers are reacting positively to the new line of WMS products, he said.

“Slot managers tell us WMS always had high-earning games and, assuming its next generation products build on past strengths, the company should regain share,” Falcone said.

Slot managers are looking for a viable third slot supplier, besides International Game Technology and Alliance Gaming, and with Aristocrat fading fast as well as limited penetration from other foreign entrants, “WMS has a tremendous opportunity to catapult ahead of its competitors near-term,” he said.

WMS is ready to come “out of the penalty box” and “we think it could regain its 10 percent to 15 percent market share by the end of fiscal 2005 with sales of 15,000 to 20,000 units, Falcone said.

Private Gaming Salons

More than six months after Nevada’s first private casino opened at the MGM Grand, private casinos there and at Caesars Palace and Mandalay Bay have attracted only a handful of gamblers and have won a relative pittance, the Nevada Gaming Control Board reports.

Sold as a means to attract international gamblers who want to bet in privacy, Nevada lawmakers and regulators changed state laws and regulations in 2001 and 2002 to allow private casino gambling in “international gaming salons.”

Through April 30, the Strip’s three international gaming salons have won only $3.5 million from gamblers, Control Board member Scott Scherer said Monday.

Those winnings came from about five visits to the three rooms, said Keith Copher, control board enforcement division chief.

“That’s like zero,” University of Nevada, Las Vegas Professor Bill Thompson said. “It’s L-O-W — low, low, low.”

The $3.5 million won from gamblers doesn’t say as much about the private casino action as would the total drop, the amount of money players exchanged for chips, a number the control board declined to provide, said John Mulkey, Bear, Stearns & Co. casino industry debt analyst.

“Without knowing the drop it’s difficult to say, but on a pure return on investment basis, $3.5 million doesn’t seem like much,” Mulkey said.

Some of the operators are using the private rooms but are keeping their doors open and the rooms accessible to the public rather than complying with the strict rules that would accompany private gambling, Scherer said.

“There’s a lot of unanswered questions still (about the demand for private gambling),” Scherer said. “Remember, (these salons opened) against a backdrop of low international play.”

Scherer also said lawmakers’ hopes that the salons would attract new business to Nevada was probably optimistic.

“These salons are not unique to Nevada,” he said. “People can gamble privately in Australia, in Macau and in (U.S. tribal casinos). I think the salons were intended to prevent the erosion of our high-end business rather than to lure new business.”

Executives for the companies operating the private betting salons say they’re not surprised initial response to private gambling has been slow.

Park Place Entertainment spokesman Robert Stewart said Caesars Palace’s marketing efforts geared toward attracting new customers for the private salons didn’t begin until the beginning of this year.

Since then, the war in Iraq and the severe acute respiratory syndrome virus outbreak severely affected Asian high-roller travel to Las Vegas, he said.

“I don’t think (the five total visits and the $3.5 million won by the three private casinos) is a surprise,” Stewart said.

Caesars regularly uses the rooms for high-rollers without closing the doors and triggering the private gaming rules, Stewart said.
“We view (private gaming) as an option for our customers,” Stewart said. “We believe we’re making the best use of these rooms with the doors closed or open.”

Mandalay Resort Group spokesman John Marz said Mandalay Bay has used its salons for private gaming on “a couple of occasions.

“I think it will grow,” Marz said, noting that private gaming was a convenience Mandalay wanted to be able to offer customers. “The level of play will be dictated by the number of Asians who come over here and (request) it,” he said.

MGM Mirage spokesman Alan Feldman cited the economy, the post-Sept. 11, 2001, tourism slowdown, a shaky economy and, most importantly, the SARS epidemic as affecting initial salon results..

“People weren’t going to get on a plane, period,” Feldman said. “As conditions change globally and we have more of a chance to market this amenity, it will grow. It was unrealistic to think there’d be hundreds of millions in revenue or hundreds or dozens of visits.”

Thompson said state rules requiring casinos to log in players, provide real-time video surveillance feeds to control board headquarters and mandating minimum $500 bets reduces the appeal of the private areas to the Asian high-rollers the changes were meant to attract.

“These rules are an administrative nightmare,” Thompson said. “For the players, it’s not worth the effort. A player gets more anonymity playing in the main casino.”

Nevada Resort Association Bill Bible said before this year’s state legislative session that the casino industry wanted the international gaming salon rules relaxed to give operators more flexibility to compete against the introduction of private casinos in California tribal properties such as Barona Valley Ranch near San Diego.

Bible didn’t return Monday phone messages seeking comment.

Scherer said the salon gaming rules regulators crafted were based on guidelines passed by lawmakers in 2001.

“We were simply trying to do what the Legislature intended,” he said, adding that he personally wouldn’t object to lawmakers revisiting the issue in 2005.

The state law enacted in 1931 allowing gambling mandated that gaming be “wide open” to the public. But legislators in 2001 passed Senate Bill 283, which allowed regulators to craft rules enabling casinos to open private gaming areas, and Gov. Kenny Guinn signed the measure.

The Nevada Gaming Commission approved rules allowing international gaming salons in January 2002; they require salon patrons to have $500,000 in cash, credit line or a combination of the two. The minimum table game bet in the salons is $500, as is the minimum slot machine denomination.

The MGM Grand’s private casino license was approved in July 2002. Caesars Palace’s was approved in September and Mandalay Bay’s was approved in December.

Some of the casino operators are using the private rooms, but are keeping the doors open and the rooms accessible to the public, Scherer said.

Scherer said it’s not clear how the salons will fare in the future.

“There’s a lot of unanswered questions still,” Scherer said. “I think the salons were intended to prevent the erosion of our high-end business rather than to lure new business.”

Executives for the companies operating the private betting salons say they’re not surprised initial response to private gambling has been slow.

Park Place Entertainment spokesman Robert Stewart said Caesars Palace’s marketing efforts geared toward attracting new customers for the private salons didn’t begin until the beginning of this year.

Since then, the war in Iraq and the severe acute respiratory syndrome virus outbreak severely affected Asian high-roller travel to Las Vegas, he said.

Internet gambling revisions

The gambling industry’s top lobbyist agreed to support an Internet gambling bill Tuesday after the House lawmaker who is pushing the legislation apparently agreed to key changes allowing such gambling in Nevada.

The American Gaming Association had opposed a bill being pushed by Rep. Robert Goodlatte, R-Va. But AGA President Frank Fahrenkopf said the lobby group’s board of directors, meeting in Las Vegas, agreed Tuesday to support the legislation — if two key changes are made.

Goodlatte has agreed to make the two changes, Fahrenkopf said. Goodlatte was not available for comment today. The Judiciary Committee could discuss the changes at a hearing Thursday.

Goodlatte’s bill is aimed at outlawing the unregulated world of Internet gambling, a difficult task that lawmakers have grappled with for six years as cyber casinos have grown into a $1.6 billion industry.

Goodlatte has sought support for his legislation from a variety of groups, including the influential AGA. But Fahrenkopf objected to two specific details in Goodlatte’s latest bill.

One centered on a state’s right to regulate Internet gambling. No state has legalized Internet gambling — yet — although it thrives nationwide, in part because of off-shore website operators.

Several Nevada companies, including MGM MIRAGE and Station Casinos Inc., are poised to offer Internet gaming if Nevada lawmakers one day make it legal.

Fahrenkopf lobbied Goodlatte to revise his bill so that Internet gambling would be allowed within a state if the state decided to legalize it. The change also would allow Internet bets to be taken from people in other states where ‘Net gambling is legal.

“It’s fundamental states’ rights,” Fahrenkopf said.

The other change centered on horse race wagering. Under changes made in recent years to the Interstate Horse Racing Act, Internet gambling on horse races can be perceived as technically legal, Fahrenkopf said.

But Goodlatte’s legislation would make wagering on horse races in Nevada sports books illegal, putting the books at an unfair disadvantage, Fahrenkopf said. So Goodlatte is said to have agreed to revise that language, at the AGA’s urging.

“We’re making it very clear that what is presently done in Nevada is still going to be legal,” Fahrenkopf said.

It’s not clear if the Judiciary Committee, scheduled to meet Thursday, will accept the two changes.

Net gambling operators

Congress took substantial action this month against Internet betting, with a House committee approving a bill to curb online gambling and a nearly identical bill being introduced in the Senate.

Similar bills have been introduced in Congress before, but none passed both houses in the same session. With increased congressional interest now, the legislation may well reach the president’s desk this year.

Gambling site operators — many of them American expatriates in the Caribbean or Central America, where gambling laws are more relaxed — have already begun to make adjustments to the changing environment by shifting their marketing efforts to other countries and devising ways to circumvent new laws.

“Will the legislation hurt us? Yes,” said Dave, the owner of the online betting site triplecrownracebook.com, who would not give his last name. “Will we find a way around it? Yes. People will always find new ways to get money to us.”

Internet gambling has surged well ahead of most e-commerce categories, reaching more than $6 billion in global sales this year, according to Christiansen Capital Advisors, a gambling industry research firm. Of about 12 million online gamblers, 5.3 million are Americans.

The new legislation would bar credit card companies, banks and other financial institutions from sending money to online gambling sites at their customers’ request. How this would be enforced is not yet known, but congressional staff members said that federal officials would most likely identify gambling sites to financial companies and that those companies would then block users from paying the sites.

Congressional sponsors of the legislation said that organized crime is heavily involved in online gambling and that the sites are used for money laundering and are more likely to defraud customers than are licensed casinos. Online gambling operators vehemently dispute such accusations.

Credit card companies like Visa and MasterCard and online payment companies like PayPal have, over the last few years, largely stopped doing business with online gambling sites, saying they do not want their cards to aid what they regard as illegal activity. In most states it is illegal to run any form of Internet gambling.

The proposed legislation would seek to end any remaining flow of dollars from American payment-services companies to Internet gambling operators.

According to Sue Schneider, publisher of Interactive Gaming News, an industry newsletter, the financial services industry’s moves have already hurt the online casino industry, where users log on to play blackjack, virtual slot machines and other games.

Schneider said the revenue of many online casinos coming from the United States had dropped 50 percent or more in the last year, because casino players tend more to be casual gamblers than, for example, people who bet on sports, and are less determined to transfer money to the gambling sites. As a result, she said, some of the larger Internet casinos like Golden Palace and Casino on Net have shifted marketing dollars away from the United States to other countries, including those that allow online gambling.

The gambling dollars are primarily flowing across the Atlantic, said Marc Lesnick, the publisher of StartCasino.com, a site for budding Web casino operators. “Everybody’s concentrating on Europe now,” Lesnick said.

Asia is another potentially large market, with the number of online gamblers expected to grow from 4 million this year to 7.4 million in 2006, according to Christiansen Capital.

Not all online casinos have given up on the U.S. market, though. Some, like Golden Palace, still tell customers to use major credit cards to pay for their casino accounts by sending payment through services like NETeller and E-CashWorld. Those companies, and others that are based in foreign countries, filled the void created when PayPal began turning away online bettors, analysts said. PayPal is a unit of eBay.

Debit cards from foreign banks are another way that gamblers in the United States can pay, although David Robertson, president of a credit card industry newsletter, The Nilson Report, said the Internal Revenue Service had been scrutinizing holders of those accounts for possible tax evasion.

While analysts said the crackdown by financial companies and regulators will continue to hurt online casinos, sports betting sites are likely to fare better. Sports betting jumped again this month at sites like BetonSports.com, MVPSportsbook.com and others because of the NCAA basketball tournament. Some of the growth has also, however, been a result of better marketing.

MVPSportsbook, an operation based in San Jose, Costa Rica, for example, will increase its marketing budget again this year, spending millions on advertisements online, in print and on radio, according to the site’s oddsmaker, who uses the pseudonym Leo Shafto.

Shafto said this year would be the first in which the site secured advertising on radio programs produced by the Sporting News and syndicated throughout the United States.

“The big radio outlets are opening up their doors,” he said.

Shafto said none of the company’s principals had taken profits out of the business since it began five years ago. They have instead put their earnings back into the site’s marketing budget.

To stay alive, many online gambling companies have had to refine their marketing programs and operational efficiency. The owner of triplecrownracebook.com, which also operates from San Jose, said he now shared technical staff and clerks with other gambling sites based there and had adjusted the maximum payout amounts.

The rise of online sports betting has also affected the traditional gambling sector. “Sports book sites have basically put the corner bookies out of business,” said Adam Schoenfeld, an Internet consultant. “Internet wagering on sports has already eclipsed, by far, the total of legal sports books in Vegas.”

As for whether online gambling is the domain of money-laundering mobsters, Shafto says most decidedly not. “Our whole idea with this is to build the site to a level where we can cash in and live comfortably from that,” he said. “I don’t know if the U.S. will be receptive to the Bookie Foundation, or whatever it is I’ll create. But I’m approaching the age of 35, and I’d like to do something a little more noble with my life.”