An important link in the supply chain

Simon Planzer: AGEM has been a partner of the IMGL for many years, but I wonder how many people are clear what the organization is and who you represent. Could you start by telling our readers a bit more about it?

Daron Dorsey: Sure. AGEM is the Association of Gaming Equipment Manufacturers, and it’s the global trade association established to be a voice for equipment suppliers, system providers and others in the business-to-business side of regulated gaming. It’s a networking and information sharing organization for member companies that include large global public companies with brand names like IGT, Aristocrat, Light and Wonder, payment companies like JCM and CPI, and some of the other niche companies like TCS John Huxley, ZITRO or Bluberi. Since gaming is a technology business with our members making computer and technology products, it’s also for suppliers to the suppliers. So there are touch screen monitor companies, computer circuit board manufacturers and a myriad of other suppliers right around the world. AGEM is the voice with regulatory authorities, government bodies, the responsible gaming community, and all the stakeholders our members deal with.

SP: And does this also include the online B2Bs?

DD: It does and that’s a good point to make especially as this industry has migrated from the traditional, land-based environment. The key is that all suppliers to regulated and authorized gaming markets around the world, whether online only or land based, are part of the AGEM community.

SP: That’s a very broad membership and one which won’t always align in terms of interests. How do you handle that as president?

DD: You’re right: our members have different perspectives and diverse interests, and when that is an issue, we try to pursue a consensus. But if we get to a point where views are diametrically opposed, then we take the position that AGEM should not come down on one side or the other or work for the benefits of certain members or against others. We let the market work through those outcomes.

SP: As a member organization, AGEM is there to serve the members, so what’s on their minds? Which issues are top of mind on the supplier side of the industry at the moment?

DD: A big one right now is obviously global trade policy as that affects pretty much all of our members in ways which are unpredictable, hard to manage and disruptive. That’s something that everyone’s having to deal with no matter where they’re domiciled, as they are all working across borders with components and subcomponents sourced from all around the world. So top of mind is how they’re going to get through the next six months. So many are publicly traded companies that have to report to the markets and shareholders and that is very complex and difficult right now.

Our members are gaming technology companies, meaning they are building or manufacturing a technology product that happens to be a gaming device. Over many years, the industry has evolved a complex global supply chain where, say, you get a touch screen from a company in one country, computer chips from a manufacturer in another, while another manufacturer uses the subcomponents from another vendor or facility somewhere else. Whether those sources are Taiwan, South Korea, China, or somewhere else, it is often different for each company. Look at the games today and you can see how different they are from 15 to 20 years ago. That’s the product of a huge amount of R&D to create machines that are highly sophisticated and that sophistication extends to the supply chain as well. Every component has been refined and integrated which takes a high degree of manufacturing capability. That can’t be switched out or changed overnight.

One thing that COVID taught us was not to concentrate the supply chain around sole source providers. That means the supply chain is much more diverse and global than it was. Our members also work with long lead times. We can’t make products on just-in-time delivery cycles, meaning we may need to buy things a year in advance to have stock of these items. That brings in another area of uncertainty: cash flow. It’s not unusual for our members to expend millions of dollars in cash for boards, monitors, subcomponents, partially assembled cabinets or other parts. Those sit on the shelves as inventory and they may not know exactly when they will be able to commercialize the completed product and for how much. So, when I talk about uncertainty, that’s why an extended timeline makes uncertainty so disruptive for gaming suppliers.

Our members develop and produce a highly integrated product where all the components have to work together, so it’s very difficult to think about finding an alternate source for one component when it’s part of a much larger whole. It has to function properly and be supported within wider product plans and portfolios. Of course, we realize we’re no different than many other industries, but we are also highly regulated by hundreds of jurisdictions around the world, meaning all of our products have to go through a rigorous testing, certification and approval process from the independent test laboratories and then the regulatory authorities. A change in any one component can mean additional certification, testing and approval and that’s not something that happens overnight. It takes a long time and it’s very costly. To get a new game or a modified game through a testing and certification cycle in all of your regulated markers costs thousands of dollars. Any one of these global suppliers will have hundreds or even thousands of games in their library, so when you look at the exponential effect of changing a component, it’s not only the cost and inconvenience of sourcing an alternative, the cash flow implications of a lag to your supply chain, but also the cost of testing and certification. I think you can see that those things combined make it difficult to navigate.

SP: You’ve mentioned uncertainty several times. Would you agree that uncertainty about tariffs is worse than, say, having 10 percent tariffs across the board?

DD: Agreed. Uncertainty makes it much more difficult to plan. When we’re thinking 12-18 months ahead or longer, we are planning what our products going to look like, what new features are we going to bring to the market to satisfy the customers of tomorrow. When we have uncertainty, we’re only thinking about the next few months and that impacts our ability to deliver the kind of innovation that has kept our industry growing these past few decades.

SP: We are hearing stories of operators scaling back their ambitions due to increased costs linked to tariffs. What is the picture that’s emerging from your customer base?

DD: I don’t know if we’re seeing that feed through yet on the supplier side. We have heard that companies are delaying capital investments or renovations, because the cost of construction is less certain. If that were to continue, that would funnel through to our members to the point where they would see it in capital replacement plans. Our operators constantly refresh the products they offer to their customers over several years. That’s where the macro effect of trade policies impacts capital decisions. If our operator customers pull back on capital reinvestment, that trickles down to decisions on what they replenish on the gaming floor. Or it changes the way they do it, so more rental or lease activity, rather than buying outright. Those are all financial decisions that our members will continue to navigate as best they can with their customers. Every customer is different, but yes, I would expect ideas and discussions about these kinds of arrangements to be explored by our members so they can get the latest, most innovative products in front of customers.

For me, it comes down to two issues: how are we going to keep delivering our products in a profitable way that satisfies the needs of our customers, and how are we going to compete against competitors who are not in the regulated space? Those two things are on every company’s mind right now.

SP: That is a neat segue to talking about the black market. Your members work in the regulated market, but tell us how the black-market dynamic works on the supplier side. And what are you as an organization and your members doing about that?

DD: When you look at the growth of our industry, that’s come on the back of innovation, great ideas and new players to the point where gaming is essentially everywhere now in some form. That’s a good thing, but at the same time, it gives a boost to those unlicensed, unregulated companies to be more prevalent. That’s the downside, because the industry is highly regulated, and we play by the rules. That means compliance, paying taxes, providing the public protection frameworks, dispute mechanisms, responsible gaming and making sure that the games are tested, certified and approved. That’s what the regulated market does, but the unregulated market doesn’t provide any of that. So, for suppliers, it is difficult when you’re competing on an unlevel playing field. When customers don’t know or can’t tell the difference between a regulated or an unregulated game, that diminishes the value of regulated products and regulated suppliers while benefiting unregulated and unauthorized ones.

We work with our partner associations – the American Gaming Association, the Canadian Gaming Association, the European Casino Association, the GTA down in Australia to name just a few – to keep them focused on the benefits of regulated suppliers. The message is, let’s work together so that your customers are safe, your taxes and revenues are secure, and we don’t have black market companies benefiting from the good work that regulated gaming has done. We are very pro regulation because wherever you have regulated markets, whether that’s land-based or online, our members will be there to deliver the products needed in those markets. Authorities should feel free to regulate whatever forms of gaming they wish to have in their jurisdiction and let that be the universe of products and games available there. We are there to be partners of regulated gaming, so let’s find a way to participate on a regulated level playing field and then the customers will decide whose products are the best.

SP: It sounds like there are a couple of elements to this. One element consists of unregulated machines finding their way into regulated casinos. The other is enforcement, where regulators actively seek them out and take action, is that right?

DD: Agreed, and that really clarifies the difference. We’re educating people so they know that the only products that are allowed are those authorized by a particular jurisdiction. The enforcement piece is difficult, because gaming regulatory authorities have limited resources. There are a lot of public policy issues. Illegal gaming is not always high on the priority list, and it may not be easy to allocate significant resources when conducting such cases takes a lot of time and energy. We support law enforcement agencies and provide information as best we can as the regulated gaming industry.

SP: You have substantial experience in this industry as a legal practitioner and now with AGEM. When you look back, how have you seen Responsible Gaming evolve in the gaming machine sector?

DD: I think a good place to start is the record we have as an industry for being responsible partners in gaming to the point where we’re no longer automatically viewed as a problem when we talk about Responsible Gambling. There’s a much more widely-held view, supported by research, that we provide a legitimate adult leisure activity, with certain safeguards and protections, that people can enjoy responsibly rather than it being seen as a public harm that needs to be immediately addressed. I think that’s progress and shows we’ve done a good job over the last couple of decades. It also shows we care about Responsible Gaming as an industry. We have funded academic and scientific research to inform views in an objective fashion, rather than relying on anecdotes, to better understand the issues surrounding problem gambling and better facilitate the activity in a responsible way.

RG has been a major focus of AGEM over the years. We have a dedicated Responsible Gaming Director in Connie Jones and AGEM dedicates 20 percent of our annual budget to RG initiatives. So we have put our money where our mouth is and we don’t hide from the issues of responsible gambling. Our industry wants to be part of the solution and we support measures to keep people participating safely and responsibly.

SP: We have seen approaches to RG change, especially in Europe. Gambling used to be a consumer choice with easily available and honest product information. I am reminded of the Reno Model developed two decades ago by Blaszczynski, Ladouceur and Shaffer that described a shared responsibility. Now the onus is on operators to be responsible, at least in Europe, rather than for consumers to take responsibility, too. I get the impression it’s different in North America, but I’d be interested in your perspective.

DD: I think we are still closer to your original model in North America. People know the rules, there are safeguards in place, and some off ramps if they need them with support and resources. What’s also happened is that regulated gaming has become much more critical to public policy and revenues as it has grown. It supports education and infrastructure with billions of dollars when you look at the overall impact of our industry. So, the emphasis is less on preventing people from taking part, and more on providing ways for them to do so responsibly. That’s where the size and the scale of that unregulated black market is an issue we can all point to. By making it more difficult for people to take part in this authorized, regulated activity, we’re pushing them into the unregulated market where there are no protections. At the same time, there’s no public benefit because that activity is not contributing to the public treasury.

SP: Over the last few years the focus has increasingly been on iGaming; this has been the growth sector. How relevant are slots still to the industry and how can the supply side to the industry help the broader industry achieve its goals?

DD: For AGEM, this is one of our key messages. The supplier side of the industry is growing and we’re providing many thousands of high-quality technology jobs around the globe. So, when the broader industry tries to talk to governments or to the public, don’t forget about us. We are a growing segment that makes a significant economic contribution wherever we are around the globe. Our supplier members are additive and complementary to all the things that you’re doing out there.

AGEM recently conducted an economic impact study for the global gaming equipment supply industry. Our data show that the industry has bounced back from a low during COVID so we are almost on a par with pre-pandemic numbers. We have a combined direct economic impact of close to US$23 billion and account for over 77,000 jobs and that’s before the indirect effects are accounted for. That shows there’s real economic impact from the supplier side of the industry. So that’s what I think the message of the next couple of years will be. It’s not just the public-facing operations: benefits come from the B2B participants too. That’s where we make a contribution and provide more support to our communities. We think that’s a good story and we want to keep telling it.