Heaven From Pennies
By focusing on tiny rural casinos, Australia's Aristocrat turned dying small-coin slots into gaming's hottest new product.
By Susanna Hamner

(Business 2.0) – Just three years ago, penny slot machines had three main growth markets--eBay, museums, and the city dump. Today a new generation of penny, nickel, and dime slots aren't just reclaiming space on casino floors; they've become the big new thing in the $3.5 billion gaming business. In the first three months of 2005, penny slots in Nevada alone paid out $191 million in casino revenue, more than double the take from the same period in 2004.

So what turned the tables? Aristocrat Gaming, the $876 million, 52-year-old slot-machine maker from Sydney, Australia, whose cashless video slots work magic on tightfisted gamblers. Aristocrat's flashy multiple-line games are programmed to pay out more frequently than dollar slots, and because the wagers seem small, players plow their winnings back into the machines. Aristocrat CFO Simon Kelly explains the math: "It's better to take 5 cents out of a player's dollar than 25 cents, because they'll reinvest the returns."

Do they ever. The company's low-denomination games collect about $400 each in casino revenue per day, double the take for the average U.S. machine. Since Aristocrat began selling in the United States in 2002, the company's net profits have doubled to $135 million. Its U.S. market share in the first quarter of 2005 climbed to 9.8 percent (a 46 percent jump from the same period in 2004) while industry goliath IGT's sank from 70 percent to 63 percent.

It's a turnaround few could have seen coming, given that the penny-slot maker had itself become a penny stock just two years ago. That's when, amid slumping sales of older coin-operated machines, shareholders filed a lawsuit against Aristocrat, alleging that the company, under ex-CEO Des Randall, had overstated profits and hidden other problems from investors.

After a management coup and the debut of cashless machines, new CEO Paul Oneile sagely began pitching Aristocrat to small rural casinos, venues packed with repeat visitors better suited to Aristocrat's complex games. Whereas old-style slots featured three to five reels and one coin wagered per line, Aristocrat's offer as many as 50 payout lines and a 1,000-credit maximum. Thus, it's a wolf in sheep's clothing: The average wager on an Aristocrat penny slot is 70 cents.

Oneile's bet seems to have paid off. Last year Aristocrat sold 12,000 machines in the United States, a 33 percent jump from 2003. "Aristocrat got ahead by figuring out what people want," says Jeff Inman, manager for Laguna Development, which runs three casinos in New Mexico. "They want excitement, they want their money to last longer, and they want a chance at winning the jackpot."

But rest assured, Aristocrat isn't sitting on all the winnings: Last year a Nevada woman took home a $1 million payout from an Aristocrat penny slot. Less than a year later, she did it again. -- SUSANNA HAMNER