Business climate As we went to press in August 2011, the sensational downgrading of theU.S.credit rating by Standard & Poor’s had dealt a body blow to the country’s economic credibility. Yet it remains a huge, business-oriented and employer-friendly market. Possible issues facing those setting up in business here include a sizeable wealth gap between affluent and less-affluent consumers, with incomes remaining flat at the lower end; an ageing population with growing healthcare and pension costs; significant variations among states in the regulatory framework; and social conservatism in some areas that may affect those local markets’ attitudes toward amusements. There are also exceptionally high levels of violent crime, by the standards of industrialised nations, in a few localities, but – perhaps contrary to the popular view – many more are quite unaffected by this.

U.S.

When coin-operated amusements first appeared during the 1930s Great Depression, early operators and manufacturers envisioned a profitable, recession-proof industry. For decades, the creativity and ingenuity of the American manufacturers and operators drove the thriving sector nationwide.

But serious challenges have confronted the industry since the early 1960s and 1970s, as urban neighborhoods’ deterioration eroded the player base. The boom in video games of the late 1970s introduced tough new laws and taxes, and the 1980s move toward home video games proved competitive with street locations.

Societal and cultural changes during the 1990s increased parents’ reluctance to allow their children out as often. And the first decade of the 21st century introduced individualised technology, inviting consumers to customise their amusement options on personal computers and phones.

This evolving culture, ever-changing technology, and competition for leisure activities have impacted every operation across theU.S., even closing down many. Laws impacting operators, both positive and negative, have passed individual state and local legislatures.

Since 2008, the American recession has devastated the economy. Reflecting that consumer caution, the U.S. Bureau of Labor Statistics reported a five percent drop in entertainment spending in 2009, the most recent year for which reporting is available.

Yet smart, innovative operators have survived and even profited by diversifying and promoting new ways to attract and retain customers. They have adapted by recognising one premise: everything is constantly changing and nothing is certain at all.

Ironically, the smallest equipment categories have often experienced the least decline in revenues. One may conclude that these speciality games have a loyal, if limited, following which actively seeks them out.

Market size and structure

In 2009, theU.S.amusements market as a whole had revenue of $5.3bn.

Pool and prize merchandising are the biggest single categories of amusement by revenue.

Each November, Vending Times releases its Census of the Industry analysis of the prior year’s sales. The latest 2010 coin-op summary reported a decline of almost ten percent in 2009. The fragile American economy will probably lead to similar 2010 results.

Calculating machine totals nationwide is difficult. Operators often refuse to reveal their proprietary information. Also, numbers fluctuate because of location changes, damage, maintenance issues and licensing fees.

Pool tables: In 2009, pool tables were the top amusement game, accounting for 33 percent of all total game revenues and 25 percent of all installations. Unfortunately, however, the market for pool tables was largely based on taverns and bars, feeling the economic brunt of the recession and decreased customer traffic in 2009.

Pool tables have been operator favourites since the 1950s because of their longevity and easy maintenance. In recent years, electronically-controlled tables have become popular, increasing revenues by up to 25 percent.

Total 2009 revenue from pool tables was $1.7bn from 290,000 tables, or $115 per table per week.

Prize merchandisers: As more traditional locations rejected pinball and video games, the prize merchandiser category, mostly comprising skill cranes, has grown. It is now the second-biggest element of the amusements sector, accounting for 19 percent of all revenue.

In 2009, total revenue was $980m from 124,000 machines, or around $152 per machine per week.

Jukeboxes: The original big-box machine has been downsized to a smaller digital box that downloads music from a remote server. In a quality-versus-quantity environment, jukebox numbers have decreased. However, revenues have increased because of fewer low-income locations and more profitable sites. Almost half – 42 percent – of all jukeboxes were priced at $0.50 per play, or three plays for $1. Average weekly income was $138.

Video games: Once accounting for the bulk (60 percent) of operators’ income, video games hit their peak in 1982. Excluding some temporary rises in popularity and income, video games have steadily declined since the 1980s, currently accounting for 15 percent of total operating income. Many newer games like the Golden Tee golf product appeal to a more mature audience with competitive sports games, and have developed to include tournament play.

Vending Times’s 2009 figures show video games generating total revenue of just over $800m, from 308,000 units. That equates to an average weekly take of some $50.

Pinball machines: Historically the operator’s most enduring type of game, the pinball machine has declined by more than 70 percent in a decade. Several reasons have been cited, including space limitations and operator preferences for a computer-based game over the complex mechanical pinball.

The flipper game was traditionally associated with taverns, candy stores, and local restaurants. Because many of those locations have closed, pinball is now considered a niche game. In 2009, total revenue from pinball was $275m from 79,000 machines, or about $67 per machine per week.

Electronic dart games: Electronic soft-tip dart games continue to benefit from evolving technology. Dart games are staples throughout tavern locations in theU.S., but have the highest concentration in theMidwest, where the region’s economic hardship since 2008 resulted in an 11 percent overall revenue drop in 2009.

In 2009, total revenue was $562m, from 148,000 machines: a weekly average of $73 per game.

Kiddie rides: This niche market continues its decline due to a shrinking children’s audience. Kiddie rides are typically operated along with bulk vendors and cranes. They have often been relocated from the sidewalk to inside a retail outlet.

Total 2009 revenue was $33m from 10,500 machines, each generating $60 weekly.

Amusements in parks: The International Association of Amusement Parks and Attractions (IAAPA) represents more than 400 amusement parks – many with on-site arcades – and traditional attractions.

IAAPA recently released its 16thAnnualStateof the Family Entertainment Centers Industry Report for 2010. Although it was an unscientific survey, the information was gathered from active members of the amusement parks/family entertainment centres category.

Statistics revealed:

61.3 percent owned their own arcade games.

16 percent had a revenue-share arrangement.

22.7 percent owned some games and participated in revenue-share for others.

66 percent said arcade games are less than 25 percent of their gross annual revenues.

38 percent operated their games primarily on tokens.

35.3 percent operated on a card system.

12 percent used quarters (25-cent coins).

24.8 percent of family entertainment centres’ mean total revenues are redemption.

Trends and opportunities

Manufacturers, importers, distributors and retailers of children’s products are now required to comply with new federal limits for total lead content in toys intended for children 12 and under. The regulations are part of the Consumer Product Safety Commission’s new guidelines. Lead limits have been gradually phased in since 2008. All toys manufactured since then must meet the new standards. A requirement for third-party testing will take effect on 31 December 2011.

One business model attempted multiple times in the past 25 years may again potentially alter the operator/manufacturer relationship. Since Wurlitzer created sales dealerships for its jukebox products in the 1930s, the American protocol has revolved around manufacturers selling their products and parts to regional distributors, who in turn sell them to local operators.

Traditionally, this three-tier dynamic was not just a buy-and-sell relationship: it was a partnership based on mutual need. The distributor frequently delivered the machine, set it up and supplied the parts and repairs. Perhaps most importantly, distributors financed the equipment.

However, the relationship has steadily fractured since the 1990s. Multi-location operators of family entertainment centres began buying equipment in bulk, toll-free numbers cut into established sales territories, and overnight freight services could quickly deliver parts to operators throughout theU.S.

Now, a small number of manufacturers may be looking to bypass the distributor and sell directly to operators. Although larger operators of family entertainment centres have established purchasing programmes, street operations        may be next to eliminate the middleman.

As mostU.S.states face financial emergencies, many are viewing the amusement category as another revenue source. Some want to co-opt it as an extension of their lotteries. Others are evaluating how amusement operators may become part of expanded money-earning opportunities, such as video lottery terminals (VLTs).

One example isIllinois, now confronting massive economic deficits. After two uncertain years, the Illinois Supreme Court ruled 7-0 in July 2011 to permit amusement operators to participate in the VLTs program legalised under the 2009 Video Gaming Act. The state may launch its operator-run video-gaming programme in on-premise liquor locations. This should benefit theIllinoisoperating community for decades.

However, operators still face several hurdles before debuting their games. The Illinois Gaming Board (IGB) must award a central system contract, and installation and testing will then take four to six additional months. There will also be time for public opposition.

If all proceeds smoothly, the IGB will issue licences to manufacturers, distributors, suppliers and terminal operators that have submitted gaming applications.

In June 2011, the U.S. Supreme Court ruled unconstitutional a contentiousCalifornialaw that restricted the sale or rental of violent video games to minors. The case, Brown vs Entertainment Merchants Association, was decided by 7-2 vote. A federal appeals court had already set the law aside.

The Supreme Court likened video games to other forms of children’s entertainment, such as books, plays and movies, that have long communicated ideas and social messages. The decision appears to indicate that video games will now enjoy protection as a form of free speech.

Industry associations

The Amusement and Music Operators Association (AMOA) was formed in 1948 to fight an attempted repeal of the jukebox royalty exemption. Although operator-focused, the AMOA also includes manufacturers, suppliers, distributors, the media and other affiliated groups in its membership.

Its 1240 member companies represent a slight drop from 1254 in 2010. Operators comprise 84 percent of the total membership. Within that figure, 52 percent are smaller operations with one or two employees. The current AMOA directory lists 45U.S.distributors and 40U.S.state associations as members.

AMOA’s operator members service a diverse customer base in out-of-home locations. The bar/tavern segment remains the largest location type, but other sites such as family entertainment centres , bowling alleys and pizzerias have also emerged as profitable venues for coin-operated equipment.

The National Dart Association (NDA), an adjunct of AMOA for 20 years, is a success story. It resulted from continued AMOA and dart machine manufacturers’ support, plus a dedicated player magazine and administration office.

With international members from eight countries, NDA sanctions 56,000 players each year. Charter holders conduct dart leagues and tournaments in more than 10,000 locations worldwide. League play culminates in the NDA’s annual international soft-tip dart tournament inLas Vegas, which is the world’s largest dart competition.

The American Amusement Machine Association (AAMA) celebrates its 30th anniversary this year. Founded by concerned amusement machine manufacturers in 1981, the AAMA actively advocates positive industry legislation, the development of promotional arenas, foreign business opportunities and more.

The current 112-member AAMA roster includes:

15 allied members (providing goods and services).

16 distributor members (selling equipment and amusement machines).

Two international members (outside theU.S.andCanada).

50 manufacturer members (producers of coin-operated amusement machines).

29 supplier members (parts suppliers).

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