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Should companies invest in grey gaming? - JBK International

January 9, 2020by Brian Carlton0

They’re easy to install, simple to use and generate a profit for their owner. So why do people question if grey gaming machines are worth the investment? The answer comes from the name. While not 100 percent legal, there’s also no law banning them from operating. Instead, they exist in a legal grey area without any oversight. In multiple states, however, that grey area is about to disappear, with lawmakers wanting to either regulate the grey gaming machines or ban them for good. So is that a positive or negative for investors? 

A question of taxes

This “grey” gaming concept isn’t new. The machines have operated for decades throughout the nation, popping up everywhere from gas stations to bars, restaurants to truck stops. There’s a concern now because in multiple states, lawmakers want more revenue without raising taxes. Regulating slot machines seems like an easy way around that issue. 

However, it’s not that simple, as no one knows exactly how many machines exist. After all, companies don’t report the number of machines they install or where they’re placed. For regulation to work, officials would have to notify each company and follow up with visits to every gas station and restaurant in the state. 

Is it worth that much effort? Nobody can say exactly how much revenue the machines bring in, even though the states throw out numbers. In Virginia, state officials estimate the machines make anywhere from $83 million to $468 million. If it falls closer to the $83 million mark, it’s not necessarily worth the cost. In order to regulate an industry, you need a new division. That means filing paperwork, hiring staff and dealing with the cost of legal challenges. Eventually, the regulation cost becomes larger than the revenue gained. 

Benefits and issues for investors

Meanwhile, the concept of regulation isn’t completely a negative one for slot machine owners. Without regulation, critics claim, the games are rigged too far in favor of the house. 

“One could make a case for it helping the industry because of the legitimacy and transparency issues [owners experience],” said Dr. Scott Boylan from Washington and Lee University’s Department of Economics. “It might bring in new players if they knew that the games functioned as expected. Also, I would expect it to increase demand from bars [and] convenience stores, because of the reduced uncertainty about its legality. I think any lost games would be at the margin.” 

As for what regulation of “grey” gaming would look like, Boylan pointed to the proposed structure in Virginia. 

“Generally, I would expect licensure, enforcement, investigation and public financial reporting,” Boylan said. “That is pretty typical. It is designed to create an air of legitimacy and transparency to the industry.” 

Missouri tried to pass a similar bill in 2018, a proposal only allowing state-approved video lottery equipment in stores and bars. Lawmakers linked it to education, with the first $100 million in generated revenue designated for public colleges and universities. Any other revenue picked up would have gone to the state’s K-12 program. That bill failed to pass, however. 

To look at what machine owners would likely have to pay, we pulled the records from Nevada’s current program, where slot machines are fully regulated. In Nevada, you pay an annual license fee of $250 per machine and a quarterly fee of $20 per machine. You also pay a monthly percentage fee, based off your gross gaming revenue. That includes 3.5 percent for your first $50,000, then an additional 4.5 percent for the next $84,000 and 6.75 percent of all revenue exceeding $134,000. 

Is there a future for “grey” gaming? 

Regulated or not, the question still remains if “grey” games can be profitable long-term. At a time when people are more interested in mobile apps or gambling on websites, is there still a market for them? 

“Right now the grey skill-based games represent an opportunity, regardless of whether they are regulated,” Boylan said, pointing out that while sports betting and online gaming are emerging, they’re not legal in all of the states where grey games operate. Even if or when those are legalized, “it’s not clear that would have any adverse impact on grey slots or other traditional forms of gaming,” he added.

JBK International is one of the fastest growing high-end retained search firms in the global CasinoGaming Technology and iGaming markets. We empower our clients to drive lasting positive change and growth through leadership. We are committed to serving our clients as trusted advisors, providing customized solutions across executive search, leadership assessment and development, and culture shaping.

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