Understanding the Economics of Slot Machine Royalties

slot machine royalties

Slot Machines are the Bread-and-Butter of Casinos

Slot Machines are the biggest money makers in casinos and that is why there is so much prime real estate dedicated to them.  An estimated 70% of gaming revenue comes from slot machines — not blackjack, not pai gow poker, not roulette, not craps, but slot machines.  When you move off of the Las Vegas Strip to other locations like suburban casinos and tribal casinos, things are even more skewed towards slot machines.  Historically the slot machines people played had nothing but public domain images and concepts, like lining up 3 cherries or bars of gold.  Casinos would buy a machine for perhaps $10,000 from a slot machine manufacturer, then spend $2000 every year or two for a conversion kit to change the game a little bit.  The cost might work out to $10 per day per machine for 5 years and the casino might make $30 to $100 per day per slot machine, depending on a whole lot of factors.  Obviously a slot machine at Caesars Palace in Las Vegas is going to generate much more than one at Terrible’s Casino in Searchlight.

The New Business Model for Slot Machine Manufacturers and Casinos

However, in the 1990’s, casinos and slot machine makers started to adapt to a new business model.  The Wheel of Fortune TV show was licensed for a slot machine game, and the machine was throwing off more like $300 per day at Vegas Strip casinos.  People were hooked on this unique game with the sounds of the TV show, a Wheel of Fortune wheel, Vanna White and Pat Sajak’s likenesses, etc.  Slot machine manufacturers like IGT started going after classic TV shows that would appeal to the 40-60 year old crowd like I Love Lucy, Gilligan’s Island, and Happy Days.  Instead of just selling the machines, they put into place a leasing or profit-sharing arrangement where the machines would cost more like $75 per day.  The rights holders to those shows would get advance checks of around $100,000 and then earn $500 to $1000 per machine (after the advance had been covered).  The actors or actresses might be entitled to a portion of the royalty fees based on their contract with the show.  There are a wide variety of other licensing deals that have since been reached with TV shows, bands, famous people, and even popular businesses or video games.  Not everyone is just targeting the older females with fanny pack crowd, either, as casinos want to get younger people playing slot machines and have gone after Britney Spears, Justin Bieber, and Angry Birds for licensing deals.

How to Invest in Slot Machine Royalties

There are a couple of different ways you could go about investing in slot machine royalties.  The first is to approach an existing royalty holder that is receiving regular checks and offer to buy them out.  This might be doable for a couple of reasons.  The first is that the slot manufacturer usually pays a large upfront fee and does not usually pay additional royalties until the royalties cover that advance.  A star may have received a large check and the small checks they now receive don’t seem that great.  Another reason they might be willing to sell their slot machine royalties is that unfortunately some big stars were one hit wonders, and are now down on their luck.  They might really need the money you offer and need it now.  The second is to find a potential royalty holder that does not currently receive royalties, but would receive checks if a slot manufacturer like IGT would be willing to develop a slot machine and casinos would be willing to purchase or lease it.  The biggest issue with the second scenario is that slot manufacturers are very picky about the games they develop.  If it is a mega brand like Wheel of Fortune or Britney Spears, they will definitely want that brand.  If it is a second tier actor, TV show, or music group, it may or may not be something they would try.

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