WMS places bets on new slot technology - Server-based gaming, arcadelike machines may spur sales jackpot

Jet fighters streak across the screen; the sound of their engines roars through a pair of Bose speakers. The latest home entertainment center? No, it's a cutting-edge slot machine from WMS Industries.

It's part of a wave of innovation at WMS, a wave signaling the slotmaker's recovery from a reputation-tainting fiasco in 2001, when software glitches allowed gamblers to cheat on WMS machines.

The ordeal caused WMS' share of the slot market to plummet from around 20 percent to single digits, share that it has regained over the past two years.

Today, Waukegan-based WMS, which does more than $450 million in annual sales, is riding high, unveiling several new slot concepts last week at the casino industry's annual trade show in Las Vegas.

One in particular, "server-based" gaming, has the potential to spur casinos into a major round of slot purchases. The concept allows scores of slot machines to be operated through a single computer server.

Such an arrangement could help casinos cut labor costs and more quickly retool their slot offerings, improving their ability to respond to what customers want.

For gamblers, server-based machines could bring about "communal" slot playing, where several people can play the same game at once--like in roulette.

WMS is heir to Chicago's storied history in making amusement games. The firm, founded in the 1940s as Williams Manufacturing Co., helped Chicago become the epicenter of the nation's pinball machine industry.

Williams later got into the video arcade game business and renamed itself WMS. But by the 1990s, it was clear the arcade game--be it pinball or Pac-Man--was dying. The future was in at-home video games and the fast-growing gambling business.

So, WMS spun off its video operation into a separate Chicago-based firm, Midway Games, and embarked on the quixotic quest of cracking a market dominated by International Game Technology, the Reno-based slotmaker commonly known as IGT.

WMS pulled it off. In a few years, it grabbed significant market share with innovative video-based slot machines that featured multiple pay-off combinations. Then in 2001, disaster struck.

Credibility damaged

A patron of a Detroit casino noticed another gambler acting suspiciously and informed casino managers. It turned out that a glitch in WMS software allowed gamblers to pile up credits without paying for them.

WMS technicians scurried across the country to mend the software. But the damage was done.

"It cost them a tremendous amount of credibility," said Robert LaFleur, a stock analyst with Susquehanna Financial. "They've spent the last few years rebuilding from that corporate crisis."

In fact, for a couple of years, WMS didn't actively market its machines while it developed a completely new operating system. "We really needed to re-engineer the quality and integrity of the product," said Brian Gamache, WMS' chief executive.

The new operating system--the computerized guts of a slot machine--debuted in late 2003, and has worked well. Meanwhile, WMS, known for its Monopoly theme games and its "Reel 'Em In" and "Jackpot Party" machines, has pumped out a steady stream of popular products.

The upshot: WMS has been solidly profitable during its past two fiscal years, after losing money in 2003 and 2004.

Its North American market share, based on units sold, has risen from 5 percent in 2002 to around 20 percent, according to a Goldman Sachs report.

And WMS' stock, now trading around $36, has perked up. It's trading at an all-time high, boosted by a recent upward revision of the company's annual sales forecast.

Plus, over the past six months, WMS has been a top-performing gambling equipment stock, after lagging its peers for the previous five years.

Arcade meets casino

At WMS' technology center on Chicago's North Side, Larry Pacey is working to keep up the momentum.

Pacey is WMS' senior vice president for product development. At the California Avenue location, once a pinball machine factory, more than 300 workers design WMS' latest slot machines.

The tech center is a place where composers--hunkered down in a state of the art recording studio--are tasked with creating the ultimate "celebratory" sound to accompany a big jackpot win.

It's a place where engineers spent more than four years on a "sensory immersion" machine, a slot with the feel of an intense arcade game. The first, which premiered at last week's industry confab, is a take on "Top Gun," where the player is a pilot of sorts.

The gambler sits in a "cockpit" complete with rear-mounted speakers. Engine noise bursts from behind, and jets rumble across the screen--all while the slots spin.

"All slot players are looking for escapism," Pacey said. In this case, they get "speed and power" with their slot game. Next up is a sensory immersion game based on "The Wizard of Oz."

"Imagine getting chased by flying monkeys and going to see the Wizard of Oz," said Rob Bone, WMS' vice president of marketing.

It's too early to tell whether the concept will be a slam dunk or an expensive flop; the machines haven't yet hit the market.

But they underscore the importance of new technology in driving slot sales.

Banking on innovation

Slot sales are influenced by several factors. There's a normal replacement cycle, where casinos swap out some aging games for new ones.

There's the new market cycle: When states or countries legalize gambling, a raft of slot orders eventually follow. New market business is relatively healthy now, though not booming like in the 1990s heyday.

Then there's the new technology cycle, when an innovation takes hold and prompts an industrywide replacement drive.

That last happened about three years ago, with the advent of slots that take only tickets, not coins. Casinos love them because they are more cost efficient.

Slotmakers are hoping server-based gaming will generate a similar buying cycle. WMS premiered a small-scale version of the technology at last week's convention.

Called "Big Event," it links a bank of Monopoly theme machines, all controlled by a single server. The system also allows for communal gaming.

For instance, in "Big Event" Monopoly, several players will place bets together during bonus rounds, some betting just a credit or two, some wagering 10 credits.

Gamblers also may get more customized service through server-based machines. For example, a server-based slot could recognize frequent playersand thus serve up extra bonuses.

Ultimately, great swaths of a casino's slot floor could be run centrally, through a server in the slot manager's office. IGT, with regulatory approval, is already testing such systems in casinos in several states.

Server-based systems reduce labor costs, since work on slots can be done centrally, not on a case-by-case basis. In fact, casinos could eventually switch out games simply by downloading them from a central server into individual slot cabinets.

Slotmakers are developing machines with LCD displays, allowing for quick changes.

Eventually, between the server and LCD screen "it will look like a whole new slot machine, instantly," said Frank Legato, managing editor of Global Gaming Business.

There's one downside to server-based machines, at least as far as gamblers are concerned.

Hard-core slot players sometimes suspect that casinos fiddle with the pay-outs on their machines, altering them if somebody is on a winning streak, Legato said.

That's not actually possible under the current system, since each machine is self-directed, Legato said. "With a server, it is possible."

So, before the technology is rolled out to the masses, gambling regulators have to fine-tune their rules to ensure server-based games can't themselves be gamed.