IAG sits down with Interblock CEO John Connelly to discuss the gaming machine manufacturer’s rapidly expanding portfolio. By Andrew W Scott
Andrew W Scott: Thanks for chatting with us John. Interblock is a little different from other global gaming equipment manufacturers in that the company operates out of Slovenia. What benefits does that provide?
John Connelly: Actually I see Slovenia as a tremendous asset and differentiating factor for our company. It’s a little known secret that the talent, education level and work ethic relative to cost is outstanding. I’ve been involved with companies that have had major offshore development in India and other countries that are more traditional and I would say that Slovenia is by far the best experience I’ve had.
So we will continue to invest heavily in Slovenia from a manufacturing and R&D perspective. There are no plans or considerations to move that. Even this year we’ve invested a considerable amount of money in both areas. We’ve expanded our manufacturing facility to keep up with demand and we’ve tripled our R&D team in the past 2 months. We will probably continue to grow that department into 2017.
AWS: And of course you have a European Chairman in Joc Pečečnik. How does that impact upon the company culture?
JC: Having a 25-year-old private company such as Interblock, there is tremendous value in that. The innovation that comes out of Interblock and the history – it was essentially the company that created ETGs. The founder was the first person to show, at a London show 25 years ago, a mechanical ETG. So that core fundamental knowledge and experience within the sector is something that is extremely valuable.
I also see it as an advantage having different cultures and visions within the company rather than just an American vision. If you want to be global, it is essential that you have an international perspective and it’s hard to do that if everything you do is located inside the United States. Having our chairman come from Europe and traveling around – I don’t want to guess how many millions of frequent flyer miles he has around the world – gives us that international perspective. And having that dichotomy between the Slovenian operation and then Latin America, Sydney, Macau and North America – it’s been highly valuable in making decisions about where we’re going in regards to our products and our priorities.
So it’s been great. I also travel a lot and I understand the importance of not managing from behind a desk in this industry. I spend around 20-odd days a month on the road visiting the offices of customers. I would say we are very much a global organization and we will continue to stay that way.
AWS: You speak of having a presence all around the world. What markets are you looking to focus on over the next 12 months?
JC: Well that’s the good news. The customers are somewhat dictating that through the growth of our company and where we’re deriving our revenue and orders. Right now we’re experiencing double digit growth across all continents so for us it’s about sustaining the infrastructure and the appropriate levels of support for the growth rate. A lot of my time and my team’s time is dedicated to servicing infrastructure to support this hyper-growth rate.
AWS: What about Asia specifically?
JC: We’re very proud of Asia. We have over 85% market share in the major casinos in the Philippines and Vietnam and we have just re-entered Macau very recently. When Macau originally opened we were the market leader. Now we’ve signed deals for upwards of 250 seats with the Venetian, we’ve got a major deal with Melco-Crown and are quite frankly in discussions with several other Macau groups. So Macau for us is very much a driver. Vietnam has always been a very strong growth centre for us and then with the changes with the VIP rooms in Macau we’re seeing a pick-up in business in the surrounding countries such as the Philippines, South Korea, Singapore and Malaysia markets that are also important to us.
AWS: Macau has gone through a systemic change in recent years and the prevailing wisdom is that we are now finally starting to come out of that. What’s your perspective on the Macau market?
JC: I feel most comfortable sharing what the experts have been telling me and that means our customers and partners. The operators are very much focussed on transitioning their properties and operations to be less focussed on junkets and more on mass market and that translates down into our business. The types of products and experiences they are looking for from us, you can definitely see that filtering down. I personally see from the trends that Macau will continue to be a force in the gaming industry for the foreseeable future and I think that’s because the people running those operations are industry veterans. They’ve been around for a long time and they know what they’re doing. I think we’ll see them transition however is necessary.
AWS: Interblock has traditionally been associated with roulette but tell us a bit about your other products and what you’re trying to do to extend the company’s appeal?
JC: When I joined about 18 months ago, that was one of my biggest concerns – that the percentage of revenue being derived from mechanical roulette in the company was far higher than I would have liked. It was over 50%. So one of the immediate things I tried to implement was to expand our product portfolio, which is why you see us tripling our R&D staff.
We now have a complete product portfolio of video which we did not have before. We have stadium designs, we have novelty products such as bar tops and wheels. We also have some real hardware designs to try and attract different types of players.
Another little known secret is that our baccarat game is actually extremely popular. As an example, at Resorts World New York we have over 600 seats attached to our baccarat units. So that’s an area we’re also continuing to invest heavily in and it’s a tremendous opportunity. That combined with opening new markets and offices. We’ve seen a dramatic reduction in the concentration of our revenue from roulette – not that roulette doesn’t continue to grow.
It’s just that other segments in our portfolio are growing faster.
AWS: Obviously Resorts World New York doesn’t have any tables which is fantastic for an ETG company such as Interblock. You released the findings of some research you did a while back on ETGs. Can you talk a little bit about that?
JC: Yeah, so to your point about Resorts World, obviously you’re right – where there aren’t traditional table games there is a higher propensity towards ETGs – but at the same time I could name several casinos where we have over 100 seats right next to live table games and the numbers suggest that it is not cannibalizing either slot operations or the table games. If anything it is reducing the costs of the operator because obviously managing an ETG compared to a live table is much more beneficial from an overhead perspective.
So we’re seeing a number of casinos replace US$5 or US$10 pits with ETGs and then really making the live tables more in the US$25 or higher segment. I think that trend in North America predominantly is exciting for us because under 0.5% of the gaming floor in North America has ETGs whereas in Asia it’s 15 to 20%, so the growth potential is astonishing. I think people are starting to realize now that an ETG should not be placed in the middle of a bunch of slot machines and it shouldn’t be incorporated within a slot report. It should be broken out into a separate reporting structure because the player demographics are different and to compare the hold of an ETG against the house average is not necessarily the right approach. We should be measuring an ETG versus how much incremental EBITDA it’s bringing to the floor. We’re seeing many groups starting to carve out a separate reporting structure which to my knowledge hasn’t happened in more than a decade. It’s always been slots and tables.
AWS: ETG players tend to be thought of more as time on device players as oppose to action seekers. Is there anything you have looked to do to address that difference?
JC: That’s a great question. One of the things you have to be very careful of when you’re talking ETGs is that the player is expecting a real live table experience so if you try to be too creative, as you might on a slot machine, you’re not going to remain true to the game, be it baccarat, roulette, craps, blackjack, sic bo and so on. There are ways you can create added entertainment or value but those are more opt-in side bets, progressives, perhaps the features you put into the game on the periphery. But the core game itself, we’ve been reluctant to touch that at this stage for a couple of reasons. One, hold percentages are already a lot lower than other products on the floor and two, if we have that it needs to be at the player’s discretion. You need to be careful not to force it.
AWS: The other very noticeable thing about Interblock is the branding, with the very strong red and black color theme?
JC: 100% of that credit goes to our founder Mr Pečečnik. He has always been very protective and very detail oriented about his brand and the luxury nature of this company so as we’ve evolved our product portfolio into other areas he personally signs off on almost everything. And we like it that way because it is one of the best assets the company has and it’s important to protect it. We’re proud of it. It’s a benefit we recognize. If you look at the gaming floor, we have 11 or 12 new products out there but they still have the same look and feel of Interblock products you’ve seen previously.
The other thing I have done to try and support that is – our new generation Diamond platform is modular in design so what it allows us to do is as we transition from one product to another, we’re able to use the same fixed assets from one area to another. That’s very beneficial because you then have less need for multiple designs across your product portfolio when you’re using the same play station, the same cabinets, a lot of the same signage. That then prevents any kind of confusion of diversion from the brand.
I think the combination of creating some parameters around what the hardware and software teams can do, and making sure that the founder is involved in all the final decisions … it works.
AWS: Yes, people come to trust a brand – particularly in Asia.
JC: Yeah, what’s interesting about Asia is that the Asian player, once they get familiar with an interface, they really stay loyal to it. Two generations ago we had a product called the G3. We’re on the G5 Diamond now but that product interface, players still remember it. There are still hundreds of those on the floor in Macau that we’re replacing right now. We were asked and took the effort to take that interface and redesign it almost verbatim onto the G5. We now have the ability on our newest platform, over a decade later, to offer our new high-end interface to players, however if an operator or a player prefers the previous version, it’s dynamic – the operator can actually change it.