Games focus :   Video Lottery Terminals

The winning ticket – VLTs

Deutsche Bank has forecast that the Beijing Lottery’s national VLT network will top 150,000 machines in 5,000 halls by 2008. that’s quite a leap from the 230 halls and 5,000 terminals in China at present, but in light of recent multi-billion million dollar acquisitions in the VLT marketplace, in which several companies are maneuvering themselves within this lucrative sector, such massive installations now look to be in reach of the mega corporations. One of the biggest deals taking place is that of China Lot Synergy, which is to pay HK$980m for a 50 per cent stake in Corich International, an investment holding company with interests in a mainland supplier of video lottery terminals. China Lot Synergy, formerly known as World Metal Holdings, plunged into the gaming market last year via HK $180m joint venture with Australia   - based Tabcorp to provide system for the nationwide roll-out in China of the lottery game keno. This latest acquisition represents an opportunity for the group to expand its operations to the lottery markets of Argentina, Colombia, India, Italy, Russia and Spain to complement the current operations which have been focused on China. The deal is China Lot Synergy’s second acquisition, following the company’s HK $204.5m intended purchase of a 90 per cent stake in British gaming system Octavian International. China Lot Synergy is paying HK $500m in cash and HK $480m in new shares for a 50 per cent stake in Corich, which owns Tianyi Electronics.

Tianyi has an 10 year exclusive agreement to supply video lottery terminals to Beijing Lottery Online Technology or CLO, the China’s sole operator of electronic lottery ticketing systems, cLO, a unit of the ministry of Civil Affairs, which administers lottery sales in the mainland. “Through the Corish acquisition, china Lot Synergy is able to participate in the development of China’s lottery market as a lottery equipment provider,” said a company spokesman. China Lot Synergy’s joint venture with Tabcorp will provide up to 60,000 lottery terminals over the next few years to CLO. The terminals will be used to run the lottery game keno, which was launched by the CLO recently in 23 mainland provinces. China Lot Synergy owns 33 per cent of the joint venture is entitled to collect 0.92 per cent of the revenue from each lottery game. In a report issued last year, investment bank Merrill Lynch estimates China Lot Synergy’s share of income from the Keno game could rise to US $ 76m   after five years. In China, lotteries fall under the remit of public welfare, and are totally directed by PRC government authorities. At present, the issuance and operation of lotteries in China are restricted to the government or government – authorized organizations. Participation of foreign enterprises in the PRC lottery industry is limited to provision of equipment and technical support only.


China still lags behind other international VLT markets in various aspects, including technology, equipment and game structure, particularly with increasingly popular video lottery games. But despite its late start, the instant lottery sector in the PRC has exhibited robust growth. The issuance and sales of instant lottery products are restricted to Lottery Online Halls, which are directly invested, set-up and operated by the provincial and municipal lottery welfare centers. At present, there are over 230 approved Lottery Online Halls and more than 5,000 VLTs, which are exclusively manufactured and provided by the Corich Group. The VLTs are installed in halls run by Beijing Lottery Online Technology, a company controlled by the national welfare lottery authority. Tianyi developed the VLT’s in cooperation with Beijing Lottery and contracted late last June to become the exclusive supplier of  the machines for the next 10 years. Tianyi has so far delivered more than 5,000 VLTs, including 1,000 shipped this year.

VLTs on the China mainland are now generating as much gambling revenue as Macau’s entire slot market. Based on Tianyi’s profit share, the machines generated 683.7m yuan in the second half of last year, just topping the 675 million patacas *HK$653.7m yuan   in the second half of last year, just topping the 675 million patacas (HK$655.3m) Macau’s slot machines captured in that period. However, Tianyi had yet to receive any of its cut due from the Beijing Lottery by year end, even though much of the money was already more than four months overdue. China Lot Synergy’s board concluded there was no need to make any provision for the unpaid bill because of Beijing Lottery’s official backing. Tianyi, which currently outsourcers VLT assembly, is considering setting up its own production line in Dongguan.


Given the political backdrop where the PRC government stamps out illegal lottery activity, casinos & online betting on the one hand, and aggressively promotes welfare lotteries on the other, the prospects for the video lottery business are encouraging.

      For CLS, the acquisition of the Corich Group further expands and reinforces the Group’s core business in participating in the PRC’s welfare lottery market. At the same time, with an international vision, the Group has actively sought suitable business partners or targets for mergers or acquisitions in complementary business sectors. In January 2006, cLS entered into a heads of agreement with Octavian International, a company headquartered in the UK. Octavian operates sales offices and technical centers in Argentina, Colombia, India, Italy, Russia and Spain. It boasts a management team specializing in advanced technology and has extensive experience in the lottery business. Octavian and CLS are committed to improving the design and quality of the VLT’s and enriching game offerings and content to cater to the specific needs of the PRC market. In addition, it is the Group’s intention to continue to boost its capability of production and provision of VLT’s, and to capitalize on the market position of Octavian in Russia, Europe, South America and Asia for exploring the international market for VLTs. CLS plans to upgrade Tianyu’s technology with expertise from Octavian, then market Tianyi’s VLT’s to Octavian, then market Tianyi’s VLT’s to Octavian customers in Europe, South America and India.


Aristocrat Leisure’s recent acquisition of Sweden’s EssNet Interactive, also firmly throws the Australian slot manufacturer’s cap into the VLT ring. While other content developers are being swallowed by lottery providers and hardware producers, aristocrat has taken the opposite approach, buying into the technology needed to run a VLT network. For Aristocrat, content is a given, but with so many companies in the IVT market, many having expressed their interest in acquisition (Cyberscan for example), so why did Aristocrat chose EssNet, it’s certainly not the biggest brand in the market?  Aristocrat’s Ian Timmis explained: “We have spent some 18 months developing and implementing a strategy to acquire a network gaming capability. Aristocrat was not in the IVT market and we see that market expanding significantly, particularly in Europe and Asia. During that 18 month period we have assessed and had dialogue with most of the (few) operators in this space or on the fringe of this market segment. EssNet Interactive’s technology in our opinion is the market leader best of breed for a number of reasons : its scalability, its open architecture and its game development kit to name a few. Interactive’s product had been selected and accepted by Norsk Tipping, a significant endorsement for the product. ” The acquisition, however, is something of departure for the slots and system management company, in a market where content is king, why should a company renowned for its pure maths games become involved in technology supply? “This technology acquisition allows us to enter a market that we are not in and which we see expanding significantly,”  stated Mr. Timmis. “We consider that an organic development path would be costly, risky, time consuming and it would be probable that the market opportunity would have passed before we got a product to market. This acquisition allows Aristocrat to leverage the technology into the class III environment true server based gaming. Potentially it also allows Aristocrat to further develop the product into the class II market and allow us to bring our own content into that segment. ”


The problem with the delivery of your own content via your own platform, is that operators can feel that they ’re being tied into just one solution from one content provider. An ideal scenario for the games developer, but not there ideal path for the operator. It’s view underlined by Peter  Hannibal of UK  gaming group, Gala, who specified that it’s Gala Gaming Platform, server-based games solution, was not tied to any one supplier. “There are lots of platforms on the market,” stated Mr. Hannibal, “but our concern was that these were being supplied by specific gaming companies with content interests. We believe that this would compromise the future development of the platform. ” Gala opted to follow an open platform route, which would enable any content developer to provide games for the GGP. As such, there is the disadvantage that operators looking to invest in this technology will see Aristocrat as a games provider, and could feel tied into a single supplier. However, Mr. Timmis is confident that operators will see past its ownership to the fact that its system is also an open platform. “Interactive strategy is an open content platform,” assured  Mr. Timmis. “We agree with that strartegy completely. We want to facilitate third party content onto the platform and will work hard to reassure operators and third party content providers that we are utterly genuine in that proposition. ” Mr. Timmis sees two potential markets for Interactive’s platform across Europe, the first, the lottery operators who wish to introduce iVT/VLTs into their product portfolios, or, where private license holders wish to introduce centrally determined and centrally controlled games/ systems. The plan involves quite a bit of future-gazing right now, but then Aristocrat recently purchased 50 per cent of multi-player company, Electroncek, and acquired a stake in PokerPro manufacturer, PokerTek. Mr. Timmis explained that the moves are part of a global stratigc plan, implemented in 2004. “These moves have all been consistent with our five year strategic plan,” confirmed Mr. Timmis. “Whilst they have occurred within a relatively short time, they have been a long time in the gestation. Clearly, we will need to ‘bed’ these down. Our strategy is for growth through organic means in our core markets, as markets continue to legalize gaming around the world as well as through selective acquisition. Aristocrat’s vision is to be the leading global provider of gaming solutions. These acquisitions are consistent with that goal. ”


Aristocrat also confirmed, as part of the acquisition, that the EssNet name is to be dropped with a new interactive title to be announced shortly. This move follows the purchase of EssNet AB by US lottery operator, Scientific Games. Scientific Games completed the purchase of the online lottery assets of EssNet AB for US $60m in March. The acquisition adds seven states in Germany, the national lotteries of Hungary and Norway, Golden Casket and Tatters all’s Lottery in Australia, and other national lotteries, to its portfolio of predominately US customers. Essnet’s 2005 online lottery revenues was approximately $40m. According to Scientific Games Chairman and CEO Lorne Weil : “The EssNet   acquisition not only gives us some strong operations in Europe, especially Germany, but also an important foothold in Australia, one of the major gaming markets in the world. ” Not satisfied with the acquisition of EssNet AB, Scientific Games completed the purchase of Global Draw in April, at a purchase price of US $183m. Global Draw is a UK supplier of fixed odds betting terminals and systems, and interactive sports betting systems. Revenues of Global Draw’s UK gaming and betting machine operations for the fiscal year ended March 31, 2006, exceeded US $55 million. Global  Draw is also extending its central determination, fixed odds system into European video lottery markets, a process Scientific Games plans to accelerate. “We’re going already done as a leading UK and European gaming business,” said Mr. Weil. “Global Draw strengthens our role in the worldwide sports betting and video lottery   business. We are all looking forward to working with the existing management of Global Draw to execute our growth strategy. ” Steve Frater, Managing Director of Global Draw, said of the deal : “We plan to use all these resources to develop the European VLT business, to further develop our position in the UK betting and gaming market and to enter new markets. ”


Scientific Games isn’t the only US lottery operator taking an interest in Europe right now, though the case of GTech is slightly different. The 5S lottery giant made gaming press headlines over 12 months ago following the acquisition of Atronic International from the Gauselmann Group. The lottery operator secured the quality of its content provision through the acquisition of one of Europe’s most accomplished casino games companies. Since then, GTech placed itself on the market in September last year, attracting an offer from Italian lottery operator, Lottomatica. The milan-based Lottomatica is the exclusive license holder and operator of Italay’s Lotto, one of the world’s larges lotteries. The European union, at the end of last month, gave the green light to Lottomatica to buy Gtech Holdings as it saw no antitrust problems. Lottomatica operates the state-run Lotto sports events and betting services. The company had sales of 586bn euros (5S $5.1bn) for Gtech. The transaction   will create one of the world’s largest gaming solutions providers, with significant global market presence and the broadest portfolio of lottery technology, services, and content solutions. The combined company will have operations in over 50 countries worldwide and approximately 6,300   employees. Following completion of the transaction, Gtech will continue to operate as a separate business unit within a newly formed Lottomatica group structure. The group is to be headquartered in Rhode Island. The transaction is not expectred to involve any substantial disruptions to the workforces of either Gtech or Lottomatica due to minimal operational and geographic overlap.


In the markets across Europe, where VLTs have been installed, monopolies continue to distort the free-market for games on VLT platforms. Both Norway and Sweden have installed VLT systems as part of state-controlled networks. But recent court battles with independent operators in Norway, fighting the imposition of a monopoly and the expulsion of AWP machines from the country, have put a halt to the progress of VLTs. Stockpiles of VLTs in warehouses are waiting for the EFTA court’s decision as to the legality of the Norway’s enforced monopoly. Should the decision go against the monopoly, the likelihood that the terminals will ever reach market is slim. AWP operators are unlikely to swap their AWPs for VLTs without a legal requirement to do so.


Perhaps the only true competitive market for VLTs and AWPs in Europe is in the Czech Republic, where licenses for the operations of VLTs were issued in 2004. At this time, national lottery operator, Saska, announced a deal with technology provider Cyber view to roll out 10,000 VLTs into the Czech market over a five year period. Since then, roll out has been extremely slow, with Saska having installed just over 100 terminals in the space of two years. Karel Hamr, owner of Czech distribution company, Jamp, is one of the growing number of VLT licence holders in the Czech Republic market “Over the past two years, VLTs have been sited in various states of testing and deployment,” said Mr. Hamr. “Comax, Synot and Saska have all placed machines on the market. Some are doing well, others not so well. The trick is trying to find the right games for the product. ” Competitors to the Saska / Cyber view product have been testing for a shorter period, but already there’s a clear distinction forming between the pure technology providers and the content- driven companies, such as Apex Gaming and Novomatic Group, who have also recently entered the VLT market in Czech. Jamp is another licence-holder looking to exploit the successful content of firms such as Imperia and Global Draw in its VLT sites. “We are currently testing Impera’s VLTs and working with Global Draw too,” said  Mr. Hamr. “We have recognized that the quality of the games on VLTs have not ignited this market because the terminals do not currently have the games that can compete with AWPs, but I believe this gap is closing. ” Mr. Hamr also contends that as the quality and acceptance of video AWPs grows in the market, with mechanical reels increasingly considered old fashioned, VLTs will become a more acceptable alternative to AWP gaming. “Right now, VLTs are not a common sight in this market,” said Mr. Hamr. Most of the current VLT players are short-odds players; they are betting shop players. We need to attract the AWP player to the terminals and only great games and content can do this. ”

      When the deal between Saska and Cyber view was announced in 2004, a number of local games creators were approached to supply Czech games for the platform. Most declined, as the terms of the agreement did not provide the financial rewards for placing their  valuable IP onto an unknown platform. Since revenue is shared between the operator, the site owner and the tax authorities, the royalties back to the games creator were deemed too slight to make the investment worthwhile. This has left a vacuum of quality holdm game content in the market, which has led to a decreasing number of machines in locations were floor-space is at a premium and the return to the operator does not justify VLT operation. “Many companies see the future of gaming in Czech Republic lies with video lottery terminals,” commented Synot’s Sales Director, Pavel Michalcio. “There’s a growing number of companies acquiring licenses for operation in the market, though most have not found success. Saska has not achieved its 10,000 terminal goal across the Czech market as it predicted. It is a machine of the future, though it is not definite when this future may start, with less than 1,000 terminals goal across the Czech market today. It is hard to say what the future holds though the potential is certainly there, and it should technically be the right model for the market. ”


Currently there are though to be approximately 9000 VLTs in the Czech market. Synot is operating around 200, Saka further operating 100, with Novomatic and Comax/ project making up the rest of the numbers. Novomatic is only operating the mach9ines within its own locations and is doing so very successfully. However, independent operators are still waiting for the ‘killer game’ that will open the door for VLTs in Czech. Whereas an operator such as Gala in the UK is weary of choosing the platform of a single content provider, the problem for the Czech market has been lack of content provision. “VLTs could change the whole market,” said Apex’s Peter Zamecik. “A successful game could open and change the market here. VLTs are low cost, easy to rent machines, transparent and fully controlled by the government. AWPs still cost the operator a huge fee to site the machine, whereas the VLT is taxed on cashbox alone. Our current gaming law forces operators to pay tax in advance for sitting AWPs, but with VLTs this tax is a percentage of the cashbox. It’s a better model for the operator. ”


Aristocrat has taken a content –driven approach to the VLT sector, in which the games creator will push its titles through in-house technology. And over the last 18 months, further content suppliers have been busily acquiring their own Czech  VLT licenses, keeping their IP in-house, while exploiting their own technology to deliver the games via terminals into their own operations. It’s been a successful formula for the Novomatic Group, which has around 300 terminals in its own Admiral gaming halls spread across the Czech Republic. Though too early for the company to comment on the success, anecdotal remarks from players and competitors in the market report that the project has exceeded all expectations. The combination of Austrian Gaming Industries ’ Technology combined with their proven games for the Czech market and a lower tax  regime for the terminals, has been yet another winning formula for the Austrian gaming giant with the midas touch. It’s a set-up that others are quick to follow. Games creator, apex Gaming, which also has an excellent track-record of game success in the Czech market, has recently acquiring its own license to operate VLTs in the market. Apex Lotto AS launched its fully operational VLT system at the World of Entertainment exhibition in April. It’s VLT system utilizes a wireless LAN network, with the first machines ready to be installed this summer. “We’re taking our games know-how and applying this experience to the VLT sector,” explained Apex’s Johannes Wiessengruber. “We’ve seen our wooden cabinet games sell over 900 pieces in the Czech market in the last three months, so we know that our games work. We have the games that the market requires. Our proposition is simple, our games on the VLT platform. ” Asked why VLTs have failed to grip the Czech players ’ imagination to date, Mr. Weissengruber also laid the blame at the door of game content. “VLT should be working – it’s a good product,” said Mr. Weissengruber. “But it must have a good game. Most of the VLT suppliers are not games creators. The technology alone will not attract players, you must have a secure network and quality games provision to succeed in the market. Some connect their system with wires, some wireless LAN. Others use a satellite. However, everyone is basically operating the same equipment, the key point of difference is the games. ” Asked if he was cannibalizing his market   by supplying the same content on video slot and VLT platforms, Mr. Weissengruber was adamant that both markets could coexist. “We are not competing with ourselves,” emphasized the Apex CEO. “VLTs provide very good additional income. We’ve paid 50m krone for the VLT license, which is a big investment. But the AWP market in Czech is saturated, with a great deal of competition. There’s been a surge of export companies supplying multi-roulettes, with some 800 pieces in the Czech market right now. VLTs provide yet another revenue stream, offering players low bets and winnings. It’s a different audience and different source of income. It’s the perfect way to operate machines. ”


Not every Czech license holder could describe the VLT experience as perfect, though. Czech distributor Comax has been working with UK-based Project on its VLT network for over 18 months. Comax’s martin Beck stated: “VLTs are continuing to be installed in the Czech market, but it’s much slower than first anticipated. There are few new games entering the market and to open a new site one needs to seek special permission from the ministry of Finance, which takes around two months to set-up – it’s a very slow process. So slow in fact, that the rest of the machine market, video AWPs in particular, are catching it up and now the whole VLT concept in Czech is blurred.


There are, of course, lots of games development companies eager to put their latest games onto VLT platforms. But one of the fundamental lessons learned from the Czech market is that local market experience is essential. VLT games that work in the UK or Norway, for example, do not translate to Czech. Firms must approach experienced content developers who has a history of success in the market. Casino Technology’s milo Borrisov told us : “We have developed games for the VLT platform in the tandem with our standalone games. My point of view is that these are two separate markets. Sandalone games have a place on the market and will still find success in many different countries. But we are also ready for the roll-out of VLTs too, whereby the first product in our range is Traffic. However, VLT providers are not game developers. Technology providers seldom understand the game elements of the product. We have some concern that a good game, housed in the wrong environment, the wrong cabinet for example, will not have the same appeal to the client. That said, we are open for discussion with providers if they want our games for their platforms – though we will always consider the final product in such a relationship. ”