CRANKIN’ WITH FRANK

If The Cashbox Is Always King, It’s Time He Was Dethroned
by Frank “The Crank” Seninsky
President of AEM and
Alpha-Omega Amusements

EAST BRUNSWICK, NJ — “The cashbox is king.” Right? We hear this all the time in our industry. But it’s not always true. In fact, this rule only holds up when it pertains to one-machine (or two-machine) locations.

Manufacturers in our industry are suffering from the misconception that operators “should” buy a new game if it earns well in the cashbox. The operator, however, uses a very different rule of thumb. Does the game increase overall location revenues, or does it simply transfer money from the other machines on the same site? Manufacturers need to concentrate on creating new machines that bring in new business – otherwise operators don’t need to buy it, and they will put off buying it, or simply won’t but it.

I recently told this to a leading manufacturer. He resisted this idea. His basic response came down to: “If operators don’t buy our product, we won’t be here and there won’t be an industry.” The underlying mentality is: manufacturers have a “right” to sell and you, Mr. Operator, have an “obligation” to buy. And that’s how the industry is supposed to work.
The facts are quite different. A dozen or so companies in our industry are indeed creating games that attract new business…and they are flourishing. Operators are buying their countertops, their merchandisers, their redemption games, and so on. I also told this manufacturer – a fellow I happen to like personally, by the way – that operators don’t buy new product, even if it’s good, unless there is irresistible demand from players and locations.

The manufacturer asked if his peers should then work to create player demand? My answer is that “Yes, manufacturer efforts to create player demand would be fantastic – ideally through promotions on TV, the Internet, magazines, and through alliances with high-profile entities such as sporting events.”

Most manufacturers don’t advertise to the public, of course. In fact they don’t promote in any fashion. Also, in general they don’t really test their products – they build them and throw them out there. Oftentimes, the operator must modify the game so it will function smoothly.

How do manufacturers set their purchase prices for new games? Hint: it’s not always based on the cost of production. And, even though many manufacturers claim otherwise, it’s not based on cost of production (build cost + labor) and past R&D costs.
Manufacturers basically set prices by looking at the cashbox and charging what they think the market will bear. Once again, we are back to the misconception that the cashbox earnings numbers exist in some sort of “splendid isolation,” totally divorced from the reality of the rest of an operator’s route.

In the case of a redemption game, the cashbox number is meaningless unless you know the ticket payout percentage, the value of a ticket, the number of coins per play multiplied by the average token or unit play value (if not an actual 25¢ quarter), and – vitally important – what other games it was competing against, and what overall gross the location was generating before the new game was installed.

Manufacturers don’t seem to realize that operators have gotten wise to their little tricks of “seeding” the cashbox of a new game on test. (But after all, a few operators have been known to “seed” the cashboxes of their own games when their routes are for sale!) Third party testing is the only reliable yardstick. My company, Amusement Entertainment Management (AEM) tests games against other games in controlled locations and we can feel confident about the results. Operators tend to only believe other operators when it comes to test results of a new game. They certainly don’t believe the numbers that are published by manufacturers and distributors whose agenda is to “sell” the game.

DO THE NUMBERS

We have seen many manufacturers go out of business in recent years. Some of them have driven themselves out of business by refusing to be realistic about pricing their products. They are locked into a model of low volume, high prices – I have no idea why. But operators intuitively sense that many of today’s coin-op products are overpriced, even if they can’t cite facts and figures from the manufacturer’s own account books to prove it mathematically. The result is that these manufacturers’ products don’t sell – until they are ultimately taken over by competitors, who figure out how to sell the same machines at competitive prices.

Believe me, many games on the market today have padding in their prices. Much is done deliberately, but much is simply through ignorance. Recently my company consulted to a manufacturer and helped them lower the build cost of their game from $11,000 to under $3,000 and another from $25,000 to $6,000. How? We increased the manufacturer’s efficiency by adopting newer technologies, using different component sources, and buying raw materials in bulk by cooperating with other small manufacturers. (This group buying is coordinated through my company as a consulting service, too.)

How can manufacturers know what price operators will find attractive? Start with the weekly gross net collection (i.e., take the cost of prizes off the top) – say $1,000. Then divide that amount by the game’s current market value, say $10,000. Lastly, multiply the result by 100 to convert to a percentage. The result in this example (1,000 divided by 10,000) is 10%. My benchmark guideline, which I have named the “rubber band ratio,” is that operators should not even consider buying a game whose initial rubber band ratio calculation is under 5%. It is also prudent to calculate the rubber band ratio for each location by taking the total weekly gross net collection and dividing it by the total current market value of all of the game related equipment in the location (including bill changers) x 100 and seeing how far above or below the 5% benchmark the result is.

Some industry members criticize this methodology by saying it means that if you own your own machines, you should be able to pay for the machine in 20 weeks (5% x 20 = 100%). This is an unrealistically quick ROI, they say. My answer is yes, but out of that revenue you have to pay the location’s half of the gross net, labor, parts, and overhead. (By the way, I also figure in the real world depreciation that impacts the market resale value of every machine, every single week!). And you must also know that the cashbox revenues of one game cannot be applied solely to that game, as only the increase in location weekly revenues can be applied to your new purchase.

Let’s set the record straight: in this industry, the player is really king. He is our ultimate customer. Of course, the location creates the environment that allows us to reach this customer. Despite many attempts by developers to recreate our industry in the image of Disneyland or some other “destination attraction,” the coin-op amusements industry today remains what it has been for decades: a low-cost “impulse buy” that people just happen to indulge in, on their way to, from, and while doing something else. It may be the bottom of the food chain, but that’s reality and we cannot succeed until we start from a clear understanding of our real position.

For example: players don’t really come to the fabulous boardwalk arcades on the New Jersey Shore primarily to play the games and win prizes. The ocean, the beach, the salt air and smell, and the boardwalk are the main draw…not the arcades! If any arcade owner doubts this, let him try moving his arcade a mile inland and see what happens to the game revenues.

THE BIG PICTURE

Manufacturers also need to know that operators run their businesses not according to isolated cashbox results, but on overall cash flow. Debits, credits, EBITDA, government formulas for depreciation, and all the other accounting tools – and individual cashbox earnings – are meaningless, unless the operator generates positive cash flow across the board first. Perhaps we operators should not expect manufacturers to understand this (after all, my accountant still doesn’t!). So “wood value” is not a good way to evaluate a route, for example. Without good locations, those games are worthless in today’s market. Again, it all gets back to cash flow.
The industry members who understand these facts will survive and thrive in the coming year. We have already been seeing consolidation for several years, and we will see more. Many of the familiar manufacturers, distributors and operators of today will be gone in two years, but the industry as a whole will be stronger than ever. Diversified operators like those on the AMOA board will survive and thrive, even if many more of the small independent operators will not have enough positive cash flow to keep the lights on.
Among the diversified survivors, many companies at all three levels of the industry are quietly having the best year they have had in three decades! I suspect that many of the readers of this column are among that select group.