IGT. For a company that s been around for more than 25 years, International SPELLS SUCCESS. Reinventing gaming s most powerful slot manufacturer

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1 IGT SPELLS SUCCESS Reinventing gaming s most powerful slot manufacturer BY ROGER GROS For a company that s been around for more than 25 years, International Game Technology is finally growing into its name. Chairman TJ Matthews joined the company in late 2001, when IGT completed the purchase of Matthews former company, Anchor Gaming. It s been nothing but growth since. We re about triple the size we were six years ago, he explains. And that is not just on revenues; it s in all the endeavors of the company things like the technology initiatives and reinvestment in the company is so much more than times past. Also in the past five years, IGT has become more international and much more technological. So internally, we say the I and the T have become much bigger parts of IGT. Matthews joined the company as chief operating officer and later was appointed CEO in His role as chairman commenced in March Joining Matthews at the top of the company in 2005 was Steve Morro, who currently serves as COO. Unlike Matthews, Morro is a home-grown executive, serving in many capacities since joining IGT in The two have transformed a company that has long been the market leader, but sometimes lacked direction. Morro, who understands both the old IGT and the new regime, explains how that helps him. In the early 90s I thought we were becoming too big to be nimble, and we re larger now exponentially since that point, he says. That s one of the things we have to work on as we grow. We need to stay in touch with our roots as a small, Reno-based technology company. TECHNOLOGICAL WONDERS While IGT achieved success by creating innovative games and delivery systems, it is today known for its technological savvy. Morro says that kind of innovation is just beginning to ramp up for We have a full list of firsts that we re bringing to the market this year, he says. Our innovative game-play or group-play features. The multi-layer displays TJ Matthews and Steve Morro that we have in the Indiana Jones machines were one of the big hits of the G2E show. It really makes video look three-dimensional, with the look and feel of spinning reels. We have a round-top LCD machine. We upgraded our investment in table games with the Digideal and multi-player stations. But the big technology initiative involved sb gaming (server-based gaming). We re doing some of this on our own and some in conjunction with Jay Walker and Walker Digital. Matthews agrees that the future of IGT lies in its technology innovations and that sb is poised to become the company s franchise product in that realm. Server-based gaming is going to have the functionality that brings games and 24 Global Gaming Business February 2008

2 applications directly to a patron, he says. At some point, we re going to wonder how we ever lived without it. IGT puts its money where its mouth is when it comes to technology, according to Matthews. We ll spend something north of $200 million on R&D this year, he says, not only to bring the complete product line along, but also branding technology that you see in sb, MLD (multi-layer displays), LCDs, re-writable cards and other things that are indications that we re going to continue to lead the industry in new technology. MARKET SHARE From a high of over 70 percent just a couple of years ago, IGT market share has slowly slipped to around 60 percent in the North American market. Neither Matthews nor Morro is concerned about that slippage, although both believe that upcoming technology improvements will at the least stabilize that share. We think that our market share now is probably a sustainable figure, says Matthews. There is some difficulty in doing this, in that WMS, Bally, Aristocrat and others are doing a better job in product development. But this is being done in a relatively stable technology environment. Where we think we gain an advantage and have an opportunity to grow share is when a disruptive technology is introduced into the market. With ticketing, that was the case. We were prepared on the technology and system side for that, and you saw an uptick in our share to over 70 percent. That s declined because of the recalibration of floors in the interim, but now that server-based gaming is on the horizon, that and other technologies we re working on have the potential to impact our company in the same way that tickets did. We re more prepared to be compatible to those new technologies than our competitors are. Morro says the improved technology may have even caused some of that decline in market share. gaming is going to have the functionality that brings games and applications directly to a patron. At some point, we re going to wonder how we ever lived without it. IGT s booth at 2007 G2E show Server-based There were some unintended consequences from TITO that we did not anticipate, he explains. Before tickets, you really couldn t do penny machines, and that was a market that we did not have a lot of experience in. Aristocrat did in Australia, and they came to the U.S. market with a full library of penny games and to their credit, they capitalized on that. Ticketing also eliminated some of the mechanical advantages we had: hoppers, coin comparators, coin escalators all things that needed a lot of engineering that IGT had perfected over the years. But those evaporated overnight with TITO, so it allowed some entry from new competitors. Market share is often spurred by the replacement cycle, a time when many casino companies realize that their existing slot machines are not stateof-the-art, and decide to upgrade. The industry is currently between cycles, and Matthews believes it won t occur again until the issues surrounding server-based gaming are resolved. The two big questions surrounding server-based gaming are when will it happen and when will it matter, he explains. IGT is working to make it happen as soon as we can. We now have a field trial in five different casino locations trying to understand what it is that the operators, regulators and the players want. We have to satisfy all those constituencies, but ultimately it will be the player that decides how it will be used. I anticipate that by the end of 2008, we ll be in the marketplace with a much more sophisticated capability, not only being able to manage real-time floors but also to bring certain applications to the player and really start to get feedback as to whether or not we can either increase the entertainment value in a way that causes them to spend more or at least bring efficiencies to the casino operators so they can decrease their costs. If we can do that all by the end of the year, I anticipate we can do fullscale, 100 percent deployment in February

3 SB GAMING The questions about sb gaming are many, and IGT is trying to provide answers for operators. If you talk to 10 people, you ll probably get 12 different responses, Morro laughs. Its most fundamental part is commonly referred to as downloadable programs, and changing the configurations of the casino floor. We think that s the core plumbing, and that we ll be able to do that with no problem. We see the real value, however, in the gaming and bonus applications that will be accessed through our service window. And it s that service window that is the portal to deliver those high-value applications directly to the player. There will be a couple of killer applications that will be developed for this system, and lots of other amenities that will be accessible through this window. To us, that s the future of sb. One of the hurdles the company first has to surmount is to determine how to market the technology and then assign a value. Morro says his direction to his sales staff has been simple. I can sum it up in one word, he says, flexible. There will be a combination of all different pricing models, depending upon the components. The base system may be a sale. But it could be based on the number of units that are hooked up to it. There could be applications that are transactionalbased, sold for a one-time fee or based on volume. It s so new and undefined, that we ll try to tailor the business model around the needs of each customer. Matthews believes there s not going to be much change from the pricing you see today. There s been a recognition that there s a big value to software over the big traditional delivery of a box, he says, and there s a much greater emphasis on what systems can do to bring incremental functionality to the casino floor. But we ll still be selling boxes and platforms that support games. We ll still be selling games into those platforms, sometimes married on a one-to-one basis with the initial shipment or at other times dropped onto an existing install base. There will still be systems sales, but they will be bifurcated into an initial application called a front-end display, and separately, the application that will actually bring this incremental entertainment to the casino operation. There will be intellectual property issues to sort out, both among the competitors and our customers. We have previously taken the lead in this area, so I think we ll continue to do so. GSA and some of the standards organizations have been very helpful in getting us to all talk. Once you have this networked environment, you have the idea that there are going to be some managed services that we can provide to our customers, but I truly believe there is going to be some great idea that doesn t exist today that will really make a big difference. And of course, it s IGT s mission to discover that great idea. Another application that will benefit from sb is the application known as community gaming. IGT s Wheel of Fortune Super Spin, released two years ago, was the company s first attempt at the multi-player station. Parlaying the theme of the most popular slot game in the world, the company has introduced similar games themed on the Star Wars movie, the ebay internet auction site, the Indiana Jones films and more. Morro says sb will enhance the popularity of this form of gaming. With sb, he explains, people sitting next to one another or on the other side of the floor can compete with one another. I think that s why table games The biggest growth will come from internally generated efforts and our ability to bring new products to the market quickly. 26 Global Gaming Business February 2008 Bonusing Screen Texas Hold em are so popular. They are inherently social, and we re bringing this to the slot areas, and our multi-player station platform is the standard for this. As we become more technological as an industry, we have the ability to allow players to collaborate, compete and cooperate towards some sort of common event, adds Matthews. It s something that I ve believed in for a long time. The idea of man-versus-machine at times can be a little cold compared to the somewhat warmer environment of the table games, where you really see people interacting. People go to a casino to some extent to be around other people. It s a natural human desire in games to demonstrate your superior skill. So getting people together for a common event versus a common foe the house and having them share at times in each other s success, is something that casino players have wanted for a long time. GUARANTEED PROFITS One of the impressive IGT rollouts at the 2006 Global Gaming Expo was a feature called Guaranteed Play, which allows players to buy a specific number of hands on a video poker game at a bargain rate. The idea can be extended to slot

4 play and even table games, a concept introduced at the 2007 G2E. The first test of the system was launched by Station Casinos in 07 on banks of video poker machines in most of its Las Vegas casinos. The results have been spotty, but Matthews says it has been successful if for no other reason than to point out that the test wasn t a full implementation. Any time you change practices on the casino floor, there is going to be some suspicion, especially when you mess with video poker, Matthews explains. Not having it server-enabled and not having it spread across the casino floor probably does not show this product in the best light. In our mind, the attraction of this product is you can package it with the rest of the casino experience and what the resort has to offer. It s a huge step forward. When you can bundle all the activity in your resort into one common offering, it s got to be a success. Whether that extends beyond promotions and packaging into a preferred way of playing games remains to be seen, but we are optimistic and believe it will. Morro emphasizes that the Station placement was just a test, and IGT learned much from it. We debated this vigorously internally, he says, putting it into the field before it is a full product. When you can sell full travel packages and timerestricted coupons, that will be the true test. At Station, we re offering a stand-alone product that s missing the key component that will make it a successful product. But we have learned things along the way game screens, how it s portrayed to the customers and more. Later this year, we ll start selling it as a package that will include a hotel room, food and beverage and gaming in a coupon form. That s when it will really hit its stride. The table game version, says Morro, has shown definite promise in a more appropriate setting. We re testing Guaranteed Play on table games on cruise ships as we speak, he says. This particular incarnation doesn t require technology. We re able to test more of the product faster and make changes faster because it s in an unregulated market. And every few days, we have an entire new group of players. What we ve been seeing there is very encouraging and more in line with what we expect to see in the video poker and slot market. Matthews says casino executives were intrigued by the concept at the recent G2E. With the table game version, he says, there s a lot of casino customer interest to see if it will interest their players. In my perspective, that interest is great to realize, but until you have it in front of IGT HOT LIST The slot market leader is exploring new technologies in several different slot genres. BY FRANK LEGATO IGT has maintained its lion s share of the market for slot machines by continuously pumping millions into research and development. The slot leader has rarely found itself behind the technology curve as a result, and typically has dozens of major new releases in every slot genre, every year. Here are five of this year s new games that IGT officials consider to be among their strongest. Indiana Jones and the Last Crusade is 1. the introduction of PureDepth, a video technology licensed by IGT that provides a perfect solution for the problem of placing reel-spinners in downloadable, server-based systems. PureDepth places two overlapping LCD panels on a common light source, to create what the company calls MLD, for multi-level display. It provides a perfect illusion of spinning reels in a video image. Used in bonus rounds, the technique results in a true 3D effect. The game itself is a 20-line, 200-credit slot with a 20-stop wheel in the top box for bonus rounds. The LCD screen incorporates 88 movie clips, which play after each win consecutively, eventually forming a sequence of the entire movie. ebay is one of IGT s new community 2. play games. Five video slots in sleek cabinets are linked to a computer server, which controls a random, common bonus round. Players wager more to achieve increases in a bonus multiplier during their primary game, and each spin qualifies them for the bonus round for eight seconds (continuous play ensures bonus qualification). A random trigger causes all eligible machines to enter the bonus round at once it is a free-spin round on a giant overhead display comprised of five individual 40- inch video reels. Two base games are themed according to aspects of the famous auction website. They are a 25-line game called Collectibles and a MultiWay game (reels purchased instead of paylines) called Fashions. 28 Global Gaming Business February 2008

5 3. 5. Wheel Poker is a standard multi-game video poker unit, offering Triple Play and Five Play versions of all the most popular video poker games, but incorporating a Wheel of Fortune -style wheel on the top, with spaces for bonus awards ranging from 150 credits to 2,000 credits. After wagering the maximum five credits for each hand in the Triple Play or Five Play setup, the player can opt to wager an additional credit on any or all of the played hands for an equal number of chances at the Wheel Poker bonus. With the ante wager made, any time the player lands a natural four-of-a-kind either on the deal or the draw on that played hand, the wheel spins for a guaranteed bonus amount. A spin button appears on the center hand, and the player presses it to spin the bonus wheel. The bonus is an added-value feature that does not affect the payback percentage, regardless of the pay schedule used. Star Wars MLP is a multi-level progressive slot, and another community play game in which individual machines each shaped like the R2D2 robot from the Star Wars films are linked to a common bonus round. Players make a side bet in the primary game that lets them accumulate points with certain symbols, and then everyone goes into the progressive bonus game at once it happens every 10 minutes. Eligible players are each assigned a Speeder bike similar to the one in films, and they race on the overhead screen (and on each individual video screen) for one of the various jackpot levels. Wheel of Fortune Super Spin/Five- 4. Player is a five-player version of Wheel of Fortune Super Spin. Two years ago, IGT broke new ground with the original nine-player Super Spin version of its venerable Wheel of Fortune game. In that version, players sit at individual stations surrounding a horizontal wheel, and the games are timed so several people go into the bonus round at once. This year, IGT brings the same concept to market in a version that requires less floor space, and which can actually be placed against a wall. On this version, the five play stations are in a line in front of a giant vertical wheel the top half of the wheel can be seen over the bank, and each player s terminal is assigned a color corresponding to an arrow on the wheel. February

6 IGT s the player who chooses to use it as part of his experience, it s just interesting, not compelling. cabinets new AVP Matthews also takes issue with the perception that the experiment at the Station casinos was not a success. I would say that it has worked on video poker, he insists. The issues are the penetration rates and dedicated machines versus server-enabled functionality, and the ability to offer that across your entire floor. So I think the server aspect of this is more important than the game. But certainly, the idea of being able to package slot machine play where a player might be more interested in the consumption of time as opposed to being particular about the game itself, the video slot might work better. VIDEO STEPS In the first games released after its pioneering video poker, IGT s strength was the stepper slot. That has continued to be a strong market for the company, despite the recent proliferation of video machines. But IGT has made great inroads into the video area as well, and at G2E 2007, the company introduced its PureDepth line of slots, which are multi-layer displays (MLDs) that remarkably simulate stepper slots. Morro says he expects these games to be popular in video-only markets like Minnesota or Rhode Island, but the company isn t giving up on the stepper-slot market, either. The spinning reels will never go away, Morro says. With the five-reel spinning reel, the machines were able to increase their market share, and now we see a little bit of a comeback in all categories. I think it s just stabilizing, and the market has found equilibrium. It continues to be a very big part of our product initiative. We unveiled our new AVP stepper at G2E with our digital service window next to the actual reels, so it can be deployed on all the machines in the casino. Reports of the death of the stepper slot were very premature, Matthews believes. At one point, there was a perception that the marketplace would become 100 percent video slots, he says. And maybe over a period of time we end up there. Today, casino floors have stabilized at around 35 percent to 40 percent physical reel-spinning slots. But players have also shown they still want all the entertainment value that comes out of the video slot space. Being able to increase line count, increase coin count, tie them into secondary bonuses, network them for common events, are all things that are possible now. Because we have such a large market share in reels in excess of 80 percent we want to come up with ways that will enable us to sustain that footprint as long as possible. If we do a good job in that area, we can develop physical reels for a long time to come. Developing new games is both an art and a science, according to Matthews. Technology is all about delivery, he explains. On the game delivery side, there have been a couple of instances where we ve developed a franchise product, whether it be the S-Plus cabinet or the platform. We believe as we move to AVP or the MLD we ve got some other franchises in the future. The game side is less predictable. As we look back at some very important times in the industry, and there are very few of them Megabucks, certainly; Wheel of Fortune, Triple Play video slots have demonstrated how an entire category has become important but no single game broke through. We re constantly trying to figure out how to have a game that becomes a franchise. When designing a new game, the IGT development team depends largely on the tried-and-true elements of other games. When we develop a new game, approximately 80 percent of the things we introduce in a brand-new product reflects things that have worked in the past, he says, while maybe some of the remaining 20 percent distinguishes it from anything that has been previously introduced. In all subsequent games, Matthew says sb, community gaming, MLD and all other emerging technologies will be considered as a part of any successful game. All those are elements of game design we re trying to bring into particular kinds of games, he says. The overall philosophy is that we re trying to develop games that people want, whether it be video or reel slots. FUN IN THE FUTURE The redefinition of IGT has only just begun. A few years ago, Matthews approved the purchase of WagerWorks, an innovative designer of games and systems for the internet. Even though online gaming is not legal in the U.S., Matthews still considers it an important coup. We recognized that if you break our business into two components of game creation and game delivery, it has more applications than just casino gaming, he explains. It can be over the internet, over telephones and even over television in some markets. We want to understand that technology so we can deliver our games in markets where it is legal. So the WagerWorks buy was made to understand that world better, and then to understand if we can make money on that in markets where it is allowed. Even with those two limited objectives, WagerWorks has been a success for us. But where it becomes materially important for IGT is when large markets authorize other forms of non-casino distribution of games. That s when WagerWorks becomes very important. These kinds of purchases of independent companies, along with some strategic alliances that have become an IGT hallmark, will continue in the future, according to Matthews. The biggest growth will come from internally generated efforts and our ability to bring new products to the market quickly. That s what we re focused on, he says. But when we have the opportunity to bring interesting technology, innovative intellectual property, game design not presently available to us, distribution reach into markets where we don t have a large presence, we do that. Over the last few years, we ve averaged three acquisitions a year, as well as a whole host of strategic alliances, so that will be a big part of our growth, as well. Challenges from competitors do not bother the company either. Morro says IGT s size is its biggest advantage. We have a commitment to our employees, shareholders and customers to be number one and to be at the forefront of technology, says Morro. There is certainly increasing competition, but at the same time, as technology and intellectual property becomes more expensive, it will be difficult for manufacturers at all levels to remain competitive. At IGT, we invest millions in technology research, more than all of our competitors combined. That s what we call a competitive advantage. 30 Global Gaming Business February 2008