WMS Industries places a bet on online gambling

Waukegan maker of slot machines looks to Nevada license as sign of opportunity

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While Illinois officials remain mired in debate over all forms of gambling, WMS Industries is predicting that casinos will soon become ubiquitous — via your computer and cellphone, at least.

The Waukegan-based slot machine maker last month received one of the first licenses to operate online poker games in Nevada, the only state other than Delaware to legalize some form of Internet gambling. WMS plans to operate online poker for existing, land-based casinos in Nevada.

Online sites in Nevada are expected to go live in early 2013, but only people physically within that state's borders will be able to play. For everyone else, WMS in July launched a free Facebook app, called "Jackpot Party Social Casino," which doesn't pay out winnings. (You play it "for fun" and spend money to stay in the game longer.)

In its first 13 weeks, the company says the app shot to Facebook's fifth most popular casino game, with about 2 million monthly active users, meaning they come back to play at least once a month.

WMS held back from jumping into online gambling in the United States for about a decade due to legal uncertainties, but with the federal government giving the green light late last year, the company hopes interactive products will soon put the company back on the upswing.

WMS' foray into online gambling has been deemed important enough for CEO Brian Gamache to wrap these efforts into a new subsidiary, also launched in July, called Williams Interactive. Gamache put his No. 2, WMS president Orrin Edidin, in charge.

"I'll be honest with you; the pace of growth of the app has exceeded our expectations. Pleasantly," said Jordan Levin, the chief operating officer of Williams Interactive, which is based in Chicago. "This is a replacement for people playing 'Pac-Man' or 'Centipede' or other uncomplicated questing games."

Of course, "Pac-Man" costs a quarter per play. When you run out of the faux $500 on "Jackpot Party," 12,000 more "coins" costs $12, or 48 "Pac-Man" plays. The target audience for online slots and play-for-fun games like "Jackpot Party" is middle-aged women, whereas online poker is skewed toward young men.

According to PokerScout.com, Americans were gambling $16 billion a year through Internet poker sites, all based outside the United States, as of 2010. That business collapsed April 15, 2011, a day the industry calls Black Friday, when the FBI shut down three major online poker sites, alleging they violated fraud and money-laundering laws. (The companies were accused of violating the Unlawful Internet Gambling Enforcement Act of 2006, which basically forbade financial institutions from processing payments for online wagers.)

But late last year, the U.S. Department of Justice issued a legal opinion permitting the online sale of lottery tickets that also lifted many obstacles to online gambling. Each state's laws apply — as opposed to a blanket federal ban — as long as the gambling operator and the customer are within the same state and the wager doesn't involve sports.

The opinion was a response to requests from New York and Illinois — it's why people can buy lottery tickets online here. It's also why WMS is just now ramping up its online operations.

"There was a proliferation of online wagering as early as 1999, but as a licensed, land-based slot machine provider, we were very, very careful about touching the space and compromising those land-based licenses," said Edidin, who also holds the title CEO of Williams Interactive. "The legality was very muddled, particularly in the U.S., so we decided conservatively to stay away from it."

Edidin said he made his first presentation to WMS executives on online gambling in the late '90s. Not until 2008 did the company start building the "Jackpot Party" website, WMS' legal, online casino in the U.K. That site went live in November 2010.

"But more recently, (online gambling) has been evolving so quickly and moving so fast, we're learning together at the same time," Edidin said.

Levin declined to release revenue figures for the Williams subsidiary, and the parent company's most recent annual report for the year ended June 30 says the financials of its interactive business were "not material" to the parent company's balance sheet.

About a half-dozen states weighed legalizing online gambling this year. And Washington, D.C., legalized online casinos as part of a 2010 spending bill only to repeal it in February, months before the games were to start.

Edidin predicts states will continue to put laws in place one-by-one. Only Utah has passed legislation recently specifically prohibiting online gambling. Many online gambling operations also could end up as arms of state lotteries.

Meanwhile, the American Gaming Association, the industry's lobbying group, continues to press Congress to legalize online casinos nationwide and plans to support legislation during the upcoming lame-duck session, said Judy Patterson, the association's senior vice president and executive director.

Unlike in the newspaper industry, where online content has cannibalized its printed predecessors, Patterson said she doesn't expect the spread of online gambling to hurt land-based casinos.

"If that had been the case, that would have already happened," she said. "We've already had the experience of an enormous number of players playing with offshore casinos. That's part of Black Friday."

WMS has weathered it all; its predecessor was founded in 1943 as a pinball manufacturer, a business WMS didn't give up until 1999. At various times WMS has made jukeboxes, coin-operated arcade games and even the popular "Mortal Kombat" video game, which was developed by its former subsidiary Midway Games. It entered the slots business in 1994.

WMS had long been affiliated with Sumner Redstone, the media mogul who controls CBS Corp. and Viacom Inc., and who had been an investor since the 1980s when it was a penny stock. Redstone's National Amusements Inc. cut its holdings in WMS substantially in 2009 to 4.9 percent. (According to the company, Redstone is no longer a shareholder.) Since then, the stock has had ups and downs. In the last year or two, it mostly has been down, which some analysts have blamed on the release of slot machines that were too complicated.

"They released this game called 'Clue,'" said Brian McGill, a casino analyst with Janney Capital Markets. "It took you 20 or 30 minutes to figure out what you were actually doing when you were playing it. They took their games and made them too advanced. They lost their way, and they lost market share."

But McGill is optimistic. He argued WMS is in strong financial shape, has a slew of new and simpler products, and can afford to take some of its revenue and invest it in online gambling. And if it doesn't work, he said WMS' core business shouldn't be affected.

According to the Roth-Fantini quarterly slot survey, WMS is the third-largest American slot machine manufacturer, with a 17 percent market share in the second quarter of 2012. It trails IGT and Bally Technologies.

In its annual report, filed Aug. 21, WMS included a chart showing that shareholder returns in 2012 had outperformed its peer group — which consists of Aristocrat, Bally, IGT and Shuffle Master — though not the Standard & Poor's 500.

Yet revenue and net income fell year over year. The company reported $689.7 million in revenue in fiscal year 2012 compared with $783.3 million the prior year. Over that same span, net income fell to $64.1 million from $81 million. Since Aug. 1, at least four major financial firms have downgraded the stock. Deutsche Bank's September downgrade caused the stock to fall nearly 7 percent in one day to $15.99. It closed at $16.65 Friday.

"We just don't know how profitable online gaming is going to be," McGill said. "No one knows what it is. Right now, there's this social aspect where you play for free, you lose fake money, and then you spend real money to get more fake money to go play online slots. Are people going to be playing online slots for free two to three years from now? Is it a fad? Like these games Zynga puts out?"

Edidin and Levin say they have a multipronged plan for making money online and girding against fads.

First, the consumer isn't going to see WMS or the Williams brand on any online casino or game. Instead, Edidin plans to pull from WMS' reservoir of successful slot-machine concepts, such as "Jackpot Party," and adapt them for online casinos.

And they're going to have a tailored approach for each jurisdiction. In the U.K., for instance, Williams operates an online casino outright. In Belgium, the plan is to operate online casinos for existing land-based casinos that can't afford to or don't have the technical expertise do so on their own. And soon Williams will deploy a third strategy in Europe, licensing its slot programs to online casinos and taking a cut of the profit those games make.

Levin said the company typically faces six to eight competitors each time it bids to license a game to an online casino. The business requires a ton of software engineering. The online casino, for instance, must be able to verify a player's age and location. So WMS has gone out and acquired two companies this year — Iowa-based video game developer Phantom EFX and online game developer and distributor Jadestone Group, based in Sweden — to help fill technical needs.

"If they're right, it does make sense to spend now on something that could pay off in the next three to five years," McGill said. He later added: "Only until you get a big state like California or New Jersey behind it — only until you cross that goal line — are people going to understand how big it could be for a company like WMS."

Melissa Harris can be reached at mmharris@tribune.com or 312-222-4582. Twitter @chiconfidential or facebook.com/chiconfidential.

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