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KENT GRAYSON AND ELLIOT FREEMAN ’12 KEL723

Royal Reels:
Enhancing the Customer Experience for Slot Machines and
Beyond

Martin Gedman, CEO of London-based Royal Reels, shook his head in disbelief as he clicked
on the link in his e-mail. The link led to a Wired magazine article titled “The 50 Best Smartphone
Apps of 2011.” Royal Reels was well known in the niche market of slot machines, but Gedman
never would have guessed that one of his products would be featured in such a prominent
technology magazine. Yet there it was, at number nine: Royal Reels’s own Wild Bulls, a game app
with a slot machine theme. Gedman was sure this publicity would generate hundreds of thousands
more purchases of Wild Bulls, adding to the nearly 10 million downloads already sold.

The e-mail had been sent to Gedman by his company’s chief technology officer, Dennis Boyd.
For months Boyd had been arguing—quite persuasively, in Gedman’s view—that Royal Reels
needed to capitalize on its success in apps by investing a minimum of £30 million in the research
and development (R&D) of new game-oriented apps. After years of playing catch-up with
Generation Games, its main competitor, Royal Reels had accomplished something Generation
Games had not even attempted: it had developed and launched a gambling-oriented app. Revenues
from Royal Reels’s app business were now equal to the revenues it earned from its more traditional
slot machine products. Boyd argued that Generation Games was unlikely to sit by and watch Royal
Reels consolidate its leading position in apps, and he wanted to be sure Royal Reels stayed one step
ahead.

Yet Gedman was not entirely convinced. Since 2008 Royal Reels had been steadily increasing
sales and revenues in its core business of slot machines (see Exhibit 1 and Exhibit 2). Gedman
thought the £30 million Boyd wanted to spend on app development might be just as beneficial (if
not more so) if it were spent on new and innovative video slot machines. Didn’t Royal Reels need
to worry about competition from Generation Games in this area as well, or was Gedman’s personal
affection for the slot machine business biasing his judgment about the viability of an apps-focused
revenue stream? Or—should Royal Reels invest in both?

Royal Reels, the Early Years


Royal Reels began under a different name: Royal Games. Gedman’s father, Richard, who held
an engineering degree from the University of Cambridge, founded the company in 1957. Richard
was an avid player of pinball, a coin-operated game in which players manipulated steel balls

©2013 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December
2009 graduates of the Executive MBA Program (EMP-76). This case was prepared by Elliot Freeman ’12 under the supervision of
Professor Kent Grayson. Royal Reels is a fictional company that was created based on industry reports and interviews with gambling
industry executives. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce
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ROYAL REELS KEL723

through a set of obstacles and targets on an inclined play field. Players controlled small plastic bats,
called flippers, at the bottom of the board that prevented the balls from falling into a hole there,
which in turn enabled the players to continue trying to score additional points. Based on his
experience as a player, Richard saw several ways pinball gaming could be improved, such as
making flippers more responsive to a player’s touch. Thanks to his engineering degree, Richard
had the technical know-how to develop the innovations he envisioned, which dramatically
improved pinball gameplay.

Richard launched his company at a time when pinball machines were becoming increasingly
popular in the United Kingdom. Many pub and bar owners found that pinball machines not only
enticed patrons inside but also kept them longer. By 1969, when the song “Pinball Wizard” from
the English rock band The Who reached number four on the UK charts, most British pubs had at
least one pinball game. Throughout the 1960s and 1970s, Royal Games led the pinball market,
partly because of Richard’s ability to develop new game features and partly because of his ability
to sell. He happily caroused with pub owners throughout England and often good-naturedly refused
to leave his barstool without a handshake agreement to install one of his games in the pub.
In the 1980s the video arcade boom struck the United Kingdom. Games such as Space Invaders,
Pac-Man, and Asteroids swiftly replaced rows of pinball machines. The long lines of players
waiting to play these games produced significantly greater profits for pub owners and a drastically
lower demand for pinball games, even among the many pubs that had strong relationships with
Gedman and Royal Games. Facing fiscal catastrophe, Richard looked to his son, Martin, to find a
new direction for Royal Games.

Martin Gedman was a mathematician who took on a senior role at Royal Games immediately
after graduating from Princeton University in the United States. While he was at Princeton, Gedman
spent some of his school holidays in gambling casinos in Atlantic City, New Jersey, where he
became as obsessed with slot machines as his father had been with pinball games. New legislation
in the 1960s opened the door for UK pubs to provide a limited number of slot machines on the
premises that offered a monetary payout. In the early 1980s the Royal Games sales force was
reporting increased adoption of slots among UK pub customers, so when his father asked him to
identify a new direction for the company, Gedman immediately thought of slots.

In the fall of 1986, after nearly a year of research and experimentation, Martin Gedman
succeeded his father as CEO with a plan to shift the company’s sales into the slot machine business.
Although slot games were technologically very different from pinball machines, the two offered
similar benefits to customers: engaging gameplay entertainment via chance, appealing thematics,
and technology. In addition, Gedman believed the relationships his father had established with pub
owners and arcade operators throughout England would give the company a key advantage in
gaining adoption of slots. Within a year of Gedman’s succession, Royal Games sold its first
machine.

Slot Machines: An Introduction


A slot machine was a gambling device offering most of its gameplay in three or more small
windows near the top of the machine (see Exhibit 3). Behind each window was a graphic such as
a word, a picture, or a symbol. Players activated the machine by inserting a coin or token (or by
swiping a card) and pressing a button or pulling a lever, which caused the words and symbols to

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spin and then stop, displaying a new pattern. (For some machines, patrons pressed a button to stop
the spinning.)

If the new pattern matched a predetermined sequence (for example, three symbols of the same
kind), the patron received a prize or a cash payout. The patterns appeared with a predetermined
frequency, so the likelihood of winning was often based entirely on chance. However, some slot
machines allowed for a player’s skill to influence the likelihood of payout—for example, by
permitting a player to “hold” a symbol from one play to the next.

The original technology for slot machines was developed in the late 1880s and did not change
much over the next hundred years. At the heart of the traditional slot machine was a set of
mechanical wheels, or “reels,” one for each window of the machine. The words and graphics were
affixed to these reels. When a patron pulled the machine’s lever, all of the reels would spin behind
the windows and then slow to a stop, revealing the new pattern.

Modern mechanical reels were programmed so that players won and lost with a fixed
frequency. These frequencies were often expressed in terms of the “payout rate” (the percentage of
wagers paid back to the customer) and the “hold rate” (the percentage of wagers the customer lost).
In the United Kingdom, the payout rate for slot machines ranged from 75 to 95 percent, with an
average of 85 percent. A payout rate of 85 percent meant that a customer who played a slot machine
1,000 times and paid £1 per spin would realize about £850 in winnings and lose about £150. The
£150 (15 percent) was the hold amount, sometimes also called the “gross gambling yield,” or GGY.
Because payouts for an individual game could be relatively large and quite unpredictable, however,
people who played only a few games would not see the 85/15 ratio of payout to hold; some won
more than they wagered, and others lost much more than 15 percent. The excitement of not knowing
how a game would turn out kept many players coming back again and again.

Until the early 1960s, it was illegal for most establishments in the United Kingdom to provide
slot machines that awarded a monetary prize; instead, many pub owners provided winners with a
free beer or cigar instead of money. Some slot machines gave out fruit-flavored candies as a payout.
Because many modern slots still featured fruit symbols similar to those that appeared on the early
machines, UK players often referred to them as “fruit machines.” After the change in regulations
in the 1960s, pubs and other establishments began providing slot machines that offered a cash
payout.

Royal Games Gains Strength in Slots


When Gedman took the helm of Royal Games, the age of the average slot player was between
45 and 50 years old. From the beginning of his tenure as CEO, Gedman saw younger customers as
an untapped market and focused on attracting players between the ages of 20 and 30. Thanks to
Royal Games’s historical strength with pinball games, this was the age range of customers at many
of the pubs with which Royal Games already had strong relationships. As the slot machine began
to take hold in pubs and gaming centers in the late 1980s and throughout the 1990s, Royal Games
distinguished itself by incorporating exciting themes and licensed brands into its gameplay, such
as Batman & Robin and The Game of Life, as well as popular movies from the time, such as Toy
Story, Men in Black, and Jurassic Park. These brands and characters not only appealed to existing
slot machine players; they also encouraged younger nonplayers to try slots for the first time.
Gedman and his team developed a knack for anticipating popular themes, as well as a reputation
for treating the licensed brands and movie properties with respect and integrity. This gave the

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company leverage to secure favorable licensing deals with copyright owners of popular TV shows,
such as Star Trek: The Next Generation and Friends. In those games, the symbols on the reels
featured characters from the TV shows, and patrons earned payouts based on certain combinations
of characters. Soon, a number of new pub owners—particularly those serving younger customers—
began asking for Royal Games slot machines.

Three years after Gedman offered his first slot machine for sale, 95 percent of the company’s
revenues came from slots, prompting Gedman to change the company’s name to Royal Reels. In
1997 Royal Reels celebrated ten straight years of double-digit profit growth. By that time the
average age of slot machine players had dropped to approximately 35, and this average age has
stayed low to the present day (see Exhibit 4).

Royal Reels Faces a Crisis


Although Royal Reels was a pioneer in slot machine development in the United Kingdom, it
was not the only innovator, nor was it the largest manufacturer. For many years the top company
had been Generation Games, which had been acquired by U.S. game developer International Game
Technology in 1996. After the acquisition, International Game Technology invested aggressively
in the development of computerized slot machines, and by 1998 a majority of the games sold by
Generation Games used video reels instead of the conventional mechanical reels. Video reels gave
the impression that mechanical reels were spinning behind the windows on the slot machine, but
the symbols in the windows were video images generated by microprocessors (see Exhibit 5). This
innovation greatly increased the ways a slot machine could attract and engage a player. “We’re not
a gaming company,” read Generation Games’s 2001 annual report. “We’re a technology company.”
Generation Games’s machines were particularly popular at larger gaming institutions, such as
casinos, entertainment centers, and managed pubs (i.e., part of a chain).
By 2002, Gedman could not ignore the fact that Generation Games sales were growing 50
percent faster than those of Royal Reels, and Royal Reels was seeing some of its customers switch
to Generation Games machines. (Because of the complications associated with having leasing
agreements with more than one slot manufacturer, nearly all UK pubs leased slot machines from a
single provider.) Gedman was committed to preventing the kind of crisis his father had encountered
when customer demand for a new technology nearly killed the company, so he took action. In the
fall of 2002, he called together the five most senior executives at Royal Reels. “We’ve gone stale,”
Gedman announced, looking weary. “We need to reinforce our focus on making the games that
customers want to play most. We need great new ideas for engaging our customers.” To generate
new ideas for gaining back some of the sales that Generation Games was taking, Gedman arranged
to have a three-day off-site strategy meeting in Birmingham, England.

Gedman wanted this three-day meeting to focus as much as possible on the customer
experience of playing slots and on how Royal Reels could retake the lead by providing the best
experiences. He also feared that any discussions about new directions for the company might be
limited by assumptions that he and his fellow executives had built up over the past decade. To help
ensure a focus on the customer experience—and to give his team some freedom to break through
any preconceived notions—Gedman arranged to have twenty-five U.S. slot machines set up in a
large ballroom at the Birmingham hotel where the Royal Reels team met. Experts on both sides of
the Atlantic agreed that the U.S. slot market tended to be a decade ahead of the United Kingdom in
terms of technological advances. Because the regulatory environment in the United States allowed
for more casino competition than that in the United Kingdom, U.S. casino managers were more

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willing to experiment with new technologies. Gedman therefore chose the newest and most popular
Las Vegas casino games for his company’s strategy meeting, all of which were video-reel games.
Gedman anticipated that, by having first-hand experience with the “slot machines of the future,”
he and his fellow executives would be better able to understand the mindset of their customers
while also thinking more creatively about how to engage them.

On the first morning of the meeting, Gedman led his colleagues to the ballroom where the
machines were set up. He encouraged them to play as many of the slot machines as they could and
asked them to take notes about their personal reactions to each. “Take off your executive hats,”
Gedman said, “and just have fun! That’s the only way we’ll ever truly understand what makes
customers so excited about them.”

The Royal Reels executive team comprised seasoned managers who had worked in gaming for
much of their careers, so they were aware of the features available on slot machines found on the
floors of U.S. casinos. But they quickly learned there was a difference between reading about a
new product and actually experiencing it. Thinking back on the strategy meeting, the company’s
president of marketing, David Stapleton, commented:

When Marty said he had created our own private Las Vegas casino, I don’t think any of
us had a clue how different the machines would be from what we’re used to here. Don’t
get me wrong, we knew about video slots—Generation Games was flooding the market
with video reels at the time. But it’s funny; I don’t think any of us knew much about what
it was like to actually play this new type of game. After we did, it became very clear what
the future of slots was likely to hold. It also became clear that we needed to make some
radical changes if we wanted to be part of that future.

While sharing their notes and observations on the first afternoon, the Royal Reels team began
to develop a customer experience framework (CEF) to capture the allure of the popular machines.
On the second morning of the strategy meeting, the Royal Reels executives selected the five
machines they thought represented the most interesting approaches to attracting and engaging
customers. Then, as a team, they huddled around each machine and watched team members play
the game. Throughout, the executives had intensive discussions about the extent to which the CEF
seemed to apply to the game, and if it needed to be adjusted. On the final day, the team gathered to
decide what implications the framework should have on the company’s strategy.

Customer Experience Framework


The CEF developed by Gedman and his team identified the three most important aspects of the
customer experience for video-reel slot machines.

1. Spark Interest: When a customer entered an establishment with slot machines, display
technology and theme presentation were key attributes that attracted attention. This was a
traditional strength of Royal Reels—an area in which it already had experience and
aptitude.
2. Deliver Options: Traditional slot machines offered players the opportunity to play only one
game in only one way; Las Vegas slot machines provided many more options. For example,
with the press of a button, players could switch from playing a game with five windows to
a game with three. This decreased the size of the payout but increased the chance of getting
a winning combination. Another button gave Las Vegas customers the option to increase
their wager and simultaneously play up to twenty “paylines,” which was equivalent to

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playing twenty different slot machines at once. Yet another button gave players the option
of winning with combinations from right to left instead of (or in addition to) the traditional
left-to-right combinations.
3. Create Surprise: The main source of excitement and surprise with traditional slot machines
was the chance that a player might get a winning combination. Slot machines in Las Vegas
provided many more opportunities for surprise. For example, they offered players the
opportunity to play a “game within a game”: if a player achieved a certain combination of
symbols, a new game with the same theme but a different kind of gameplay appeared on
the screen. The game within a game was usually relatively short (usually around a minute),
but it added to the surprise without affecting the payout.

By understanding the customer experience, Gedman was confident he could develop a


customer-focused strategy of developing innovations that would help Royal Reels beat the
competition, instead of the other way around.

The Purchase of Digital Design Systems


Delivering options and creating surprise was almost impossible without video technology, and
Royal Reels had no experience with that type of slot machine. Gedman recognized that his company
did not have enough time to develop the skills to invent and manufacture a competitive video slot
game, so he decided to purchase this capability by buying a video technology firm. Although
purchasing a company would be a landmark investment for Royal Reels, it was certainly feasible.
The company was flush with free cash; the Gedman family still owned more than 70 percent of
Royal Reels’s stock, and the company had never issued stockholder dividends. Nearly fifty years
of steady growth had more than supplied the capital needed for a large investment.

In the early 2000s, the at-home video gaming revolution had fostered a multitude of start-up
game development companies hoping to capture the attention of Nintendo, Sony, or Microsoft.
After a nine-month search, Gedman identified a development company that might be right for
Royal Reels: Digital Design Systems (DDS), an up-and-coming game developer based in Liverpool
and led by 31-year-old Dennis Boyd.
DDS promised to add three key capabilities to Royal Reels. First and foremost, it would provide
the microprocessor-based video systems and graphics technology the company needed to begin
developing video content. Royal Reels committed £60 million over two years to this project.
Second, the DDS creative department would bring a new energy to developing themes and
gameplay options. Finally, DDS had early patents for an experience management system that would
allow server-based slot machines to track specific players via a login key and to customize their
game experiences.

Dennis Boyd and his team had always imagined DDS being acquired by a major video game
company, but Royal Reels’s financial offer was higher than they expected. Furthermore, they
realized that joining Royal Reels would give them a unique opportunity to change an entire
industry. After a tender offer of £40 million in September 2003, Royal Reels fully absorbed the
DDS staff and assets and made Boyd its chief technology officer. The DDS team continued to
operate in Liverpool and Boyd split his time between DDS and the Royal Reels office in London.

Boyd took quick ownership of Royal Reels’s CEF. He established a process for game
development that included three stages: concepting, prototyping, and market testing. Each stage

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concluded with an evaluation using the three customer experience criteria identified in the CEF; if
a video slot game concept did not spark interest, deliver options, and create surprise, it was sent
back to be redeveloped.

At a crucial meeting in mid-2004, Boyd gave Gedman and other senior executives a chance to
see his first prototypes. At first, their reaction was lukewarm, and they proposed a number of
improvements. The executives became much more enthusiastic, however, when Boyd presented
the results of a market research study in which customers were asked to play and then rate four
Royal Reels games, two older games and two of the new prototypes. On the key dimensions of
interest, options, and surprise the new machines performed significantly better than did the old
ones. Boyd had delivered exactly what the company’s new strategy demanded.

In late 2005 Royal Reels launched three DDS-designed video-reel games that offered more
sophisticated display technologies, up to fifty paylines, and a variety of bonus rounds, as well as
new and unexpected extra game opportunities. Two of the games were based on the popular
entertainment titles Batman Begins and Battlestar Galactica, and the third was based on a brand
created in-house at Royal Reels.

In-house brands represented a new direction for the company, but Boyd had argued that if
Royal Reels’s games were as exciting and engaging as they hoped, the company would not need to
depend solely on other brands to gain consumer interest. Developing its own brands gave Royal
Reels more profit, as well as more decision-making power over how to leverage them. The first in-
house brand was Wild Bulls, a game in which players accumulated a herd of cross-eyed bull
characters via successively aligning reels. The bulls could be dispatched to “Bulltown” to stampede
a variety of structures, the most desirable of which was the town’s bank, which was full of jackpots.

In 2006—its first full year of selling video-reel slots—the number of Royal Reels machines
grew 13.6 percent, more than four times the growth rate of any of the previous ten years. (See
Exhibit 2 for number of machines leased by Royal Reels and its competitors.)
That same year, however, the British government announced that starting in 2007 it planned to
implement a smoking ban in pubs and restaurants. Nervous about the effect the ban would have on
their business, pub owners committed to few additional slot machines for the following year.
During 2007 pubs experienced a 7 percent decrease in customers, which resulted in a similar
decrease in spending on slot machines located in pubs. (See Exhibit 6 for GGY figures for
gambling overall in the United Kingdom and for slot machines in particular.) Gedman was
concerned that this new legislation had come at a particularly bad time: the new games had shown
great promise during their first year on the market, but the smoking ban was keeping Royal Reels
from gaining momentum.

Things appeared to go from bad to worse when the smoking ban was quickly followed by the
world financial crisis of 2008. But Gedman—and everyone else in the gaming industry—was
surprised to discover that budget-constrained customers began to play low-stakes betting games
like slots more frequently. The increased demand for slot machines encouraged more
establishments to adopt them, and as a result, Royal Reels enjoyed a nearly 10 percent increase in
its number of leased machines between 2008 and 2011. By 2011, nearly 80 percent of the machines
the company offered were video reels.

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The UK Slot Machine Industry in 2011


In 2011 slot machines could be found at more than 70,000 pubs, bars, clubs, bingo halls, arcade
halls, and casinos in the United Kingdom. Except for those at casinos, UK slot machines allowed
a maximum bet of £1 and offered the chance of winning a maximum payout of £50–70, though
most machines in pubs paid £20–30. Although some machines allowed bets lower than £1, virtually
all slot players bet the maximum amount. The average wager per spin was £1.

Individual pubs were allowed to have up to four machines. Managed pubs, which were part of
a chain and which tended to be larger establishments, were allowed to have up to six, which were
often placed in a small gaming room or gaming area within the pub. Larger gaming businesses,
such as casinos and arcade centers, had fewer restrictions on the number of machines they could
operate. As shown in Exhibit 7, establishments that could legally offer a slot machine tended to
provide the maximum number allowed by law.
Purchasing slot machines cost establishment owners between £8,000 and £12,000, so the vast
majority of establishments leased their machines; leasing required little or no initial financial
commitment and gave the establishments the flexibility to switch machines during the term of the
agreement. Leasing agreements often required the manufacturer to manage all aspects of slot
machine operation, from performing any necessary repairs to collecting the coins from each
machine.

In 2011 slot machines generated £2.4 billion in GGY, which was the hold (or wagers minus
payouts) (see Exhibit 6). Under a typical revenue-sharing arrangement, the leasing establishments
kept half of the hold (£1.2 billion); the other half went to the slot manufacturers. Assuming an
average hold rate of 15 percent, UK customers wagered a total of £16 billion (£2.4 billion / 0.15)
on slot machines.

In 2011 three companies—Generation Games, Royal Reels, and a third, much smaller company
named Dexteira—generated 72 percent of industry revenues. (See Exhibit 8 for revenue figures
for Royal Reels and its competitors.) The remaining 28 percent of the market was composed of
eight to ten manufacturers whose products served more niche customer needs. Dexteira was a
descendant of the Bell-Fruit Games Group, which predated Royal Reels in mechanical-reel slot
machines. Dexteira’s game catalog consisted largely of “classic” games offering themes and
combinations that had been part of slot machine gaming for decades and that never seemed to go
out of style with pub patrons. In contrast with the games offered by Generation Games and Royal
Reels, Dexteira’s were conventional mechanical-reel machines. To the extent it invested in new
product development, Dexteira tended to focus on ergonomic features. For example, in 2009
Dexteira began offering machines that had several built-in plastic holders for pint glasses, which
presumably made it easier for friends to socialize and drink together while one of them played the
game. (Exhibit 9 reports the distribution of slot machines for each of the major UK competitors in
2011.)

The Slot Machine Customer


In 2011 there were about 49 million adults age 18 and older living in the United Kingdom. Of
those, 73 percent had participated in some type of gambling activity (including the National
Lottery) in the previous year. The demographics of that 73 percent did not differ significantly from
those of the UK population overall, although male gamblers participated in significantly more
gambling activities (on average, 2.3) than their female counterparts (on average, 1.6). Of those who

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gambled, nearly 29 percent took part in slots—35 percent of male gamblers and 23 percent of
female gamblers. (See Exhibit 4 and Exhibit 10 for more details on demographics of gamblers and
the playing frequency of slot machine players.)

People who played slot machines in casinos and entertainment centers tended to be relatively
solitary gamers who enjoyed “getting into the zone” and playing game after game as a way of
relaxing or escaping. Many of those who played in the game areas of managed pubs were also
relatively solitary, either because they were waiting for friends to arrive or because they came to
the pub mostly to play slots. One of these customers could play about one hundred spins per hour
on a mechanical-reel slot machine, which amounted to an average spend of £100 per hour (with a
hold of £15 and payback of £85). In most independent pubs and clubs, however, slot machine
gaming was considered a secondary activity to socializing; customers played slots while having
drinks and talking with their friends. This reduced the customers’ average number of spins per hour
to fifty and lowered their revenue potential. See Exhibit 11 for information on customer
preferences for slot machine types.

Leveraging New Skills in New Markets


When Boyd agreed to sell his company to Royal Reels and to work on innovations in the slot
machine industry, he and his team did not give up on the idea of developing offerings for the online
and electronic gaming markets. During his negotiations with Gedman over the purchase of DDS,
Boyd expressed his belief that the look and feel of games developed for slots could be migrated
easily to online or smartphone platforms. Boyd got a verbal agreement from Gedman that Royal
Reels would seriously consider the possibility of competing in this new market.
In 2003 (the year Royal Reels purchased DDS), the UK government updated its gambling laws
to include a definition of “remote gambling,” as well as licensing regulations for this newly defined
form of gambling. Previously, the UK regulatory system had not formally recognized or licensed
online gaming, which created uncertainty about its current and future legality and which made
many gaming organizations reluctant to enter this channel. Now that clear laws were in place, many
of these organizations felt comfortable launching ventures in the online world. Generation Games
immediately began encouraging customers to try virtual slot games by offering some free online
games. Gedman’s intense rivalry with Generation Games and his verbal commitment to focus on
the online market meant that Boyd was able to convince him to invest in developing online versions
of the video-reel slots DDS was developing. When its first three video-slot machines were
introduced in 2005, Royal Reels concurrently launched online versions, which competed well
against the offerings from Generation Games.

About three years later, Apple announced it was planning to launch an “app store” for
smartphones. Although few people at the time knew what an “app” was, Boyd saw a clear
opportunity for the company to further leverage the experience and the brands it had been
developing. Gedman was particularly enthusiastic about this new market. “We had been playing
‘catch up’ with Generation Games since I first decided to go into video slots,” Gedman said. “Now
was our opportunity to leap ahead.”

Boyd and his team immediately set out to develop a slot-themed game to sell through Apple’s
store. They decided to base it on Wild Bulls, which by that time was well known among UK gamers.
Boyd and Gedman hypothesized that people who became familiar with Wild Bulls as a mobile app

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would be more likely to play the slot machine in a pub environment. In effect, app users would be
paying £0.99 for a Royal Reels advertisement for its Wild Bulls slot machine.

At the time, there was great uncertainty about how customers would respond to the concept of
a central clearinghouse for apps. Partly as a result, many of the popular game apps mimicked
experiences that occurred outside of the mobile device and used branding familiar to the customer.
For example, the Texas Hold ’Em poker game was the most popular paid app in 2008.

Wild Bulls proved extremely popular, and after Boyd and his team became more innovative
with updates, the game’s success accelerated in 2009, capturing the notice of iPhone-wielding
teens, Blackberry-toting professionals, and online gamers alike. “All of a sudden, new money
started pouring in,” Gedman recalled. “I gave Boyd the thumbs-up to run with this and he did. He
made the bull characters into digital celebrities. Companies of all kinds came knocking on our door
to license the Wild Bulls brand. Next thing I knew, kids were wearing jumpers with our bull faces
on them. There were Wild Bulls–brand stuffed animals and Wild Bulls kitchen plates. Even some
of the top celebrities were saying they were addicted to Wild Bulls. Probably the queen, too!”

Looking Ahead
Gedman had taken a huge risk when he purchased DDS, but thanks in great part to Boyd and
his team, 2010 and 2011 had been banner years for Royal Reels. The company had grown to more
than 5,000 employees, and Wild Bulls continued to enjoy media attention. Boyd and his team
worked feverishly to build on the success of Wild Bulls by introducing exciting new updates and
spin-off games. Versions of Wild Bulls had been downloaded more than 10 million times, and net
income for Royal Reels had almost doubled since 2003. Royal Reels now took in more revenues
than Generation Games, which still had not attempted to enter the app market. Was now the time
for Gedman to take another risk? And if so, which was riskier: not investing in apps or not investing
in video-reel slots?

While Gedman was contemplating this question, he attended a quarterly sales meeting led by
the company’s vice president of slot machine leasing. Sales figures for 2011 had been nearly 4
percent higher than those for 2010. Considering that the effects of the 2008 economic crisis were
still being felt in many countries (including the United Kingdom), the figures seemed robust. Yet
Gedman was troubled that licensing figures for the Wild Bulls slot game had been decreasing for
the past two years. When Gedman asked why pubs and casinos were switching their Wild Bulls
games for other slot games, the vice president seemed surprised that Gedman did not know the
reason. “All I can tell you is what the pub owners tell us,” he said. “They say that when customers
come for a drink, they don’t want to pay to play a game they’ve been playing all day on their
smartphone for free!”

10 KELLOGG SCHOOL OF MANAGEMENT


This document is authorized for use only in Siddharth Srivastava's SG EMBA/ Marketing Audit at S P Jain School of Global Management - Dubai from Jun 2018 to Dec 2018.
KEL723 ROYAL REELS

Exhibit 1: Royal Reels Financial Information (£ in millions)


2003 2004 2005 2006 2007 2008 2009 2010 2011
Total revenues 259.3 264.9 272.4 290.9 269.9 343.5 441.5 546.2 605.9
Slot machine leasing 259.3 264.9 272.4 283.9 258.5 269.1 279.0 290.2 301.8
Online and mobile games 7.0 11.4 74.4 157.5 248.0 300.1
Wild Bulls licensing 5 8 4
Total cost of sales 73.6 79.7 91.0 109.6 104.6 133.1 185.3 233.2 257.1
Cost of slot leasing sales 73.6 79.7 91.0 105.1 98.2 94.2 100.7 103.0 103.8
Cost of online/mobile sales 4.5 6.4 38.9 84.6 130.2 153.3
R&D 35.8 36.8 33.5 61.1 62.1 34.3 54.1 71.6 73.4
General and administrative 50.3 54.6 54.5 58.2 54.0 68.7 87.3 107.6 120.4
Net income 99.6 93.8 93.4 62.0 49.2 107.4 114.8 133.8 155.0

Exhibit 2: Number of Leased Slot Machines in the United Kingdom


2003 2004 2005 2006 2007 2008 2009 2010 2011
Generation Games 85,345 87,923 91,557 94,399 93,810 94,159 97,529 101,994 105,135
Royal Reels 68,907 70,321 72,421 82,297 81,490 79,145 81,455 84,572 87,900
Dexteira 19,750 21,485 21,916 23,125 25,575 28,817 34,569 41,851 48,061
Other 74,598 77,023 83,408 82,255 87,631 87,696 87,230 85,577 89,687

KELLOGG SCHOOL OF MANAGEMENT 11


This document is authorized for use only in Siddharth Srivastava's SG EMBA/ Marketing Audit at S P Jain School of Global Management - Dubai from Jun 2018 to Dec 2018.
ROYAL REELS KEL723

Exhibit 3: Traditional Slot Machine

Exhibit 4: Age and Gender of Gamblers, 2011

Among those who gamble, what is the age and gender of those who participated in the eight most
popular gambling activities in 2011?
Men Women
18+ 18+ 18–24 25–34 35–44 45–54 55–64 65–74 75+
(49%) (51%) (12%) (17%) (18%) (17%) (15%) (11%) (10%)
National lottery 81% 79% 68%a 72% 74% 91% 90% 85% 80%
Another lottery 33% 36% 16% 29% 30% 41% 42% 44% 40%
Scratch cards 31% 36% 44% 45% 37% 31% 27% 23% 22%
Slot machines 30% 24% 37% 34% 28% 27% 21% 20% 17%
Horse races 27% 23% 20% 27% 30% 33% 25% 17% 15%
Sports betting 21% 3% 19% 20% 15% 14% 5% 2% 1%
Football pools 10% 2% 11% 8% 5% 5% 4% 5% 4%
Dog races 9% 3% 3% 3% 9% 8% 7% 8% 1%

Notes: Sample = Respondents who said they participated in at least one of these activities in 2011.
The column headings indicate the demographic category and (in parentheses) the percentage of total UK gamblers this category represents.
a
To be read as: “68% of 18- to 24-year-olds (who represent 12 percent of all gamblers) report that they played the National Lottery at least
once during the past year.” (Columns do not add up to 100 percent because people participated in more than one activity.)

12 KELLOGG SCHOOL OF MANAGEMENT


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KEL723 ROYAL REELS

Exhibit 5: Video-Reel Slot Machine Screen

Exhibit 6: Gross Gambling Yield for All Gaming Activities in the United Kingdom
(£ in millions)
2003 2004 2005 2006 2007 2008 2009 2010 2011
Total UK GGY 4,375 4,519 4,664 4,803 4,948 5,131 5,315 5,507 5,710
Percentage of UK GGY
42.8% 42.9% 43.0% 43.3% 39.1% 40.0% 40.9% 41.8% 42.8%
that is slots

Notes: Total GGY includes expenditures on lotteries, online gaming, and betting (e.g., horses, sports), as well as expenditures at casinos,
bingo halls, arcades, and pubs.
Slot companies receive only 50 percent of GGY because of leasing agreements.

Exhibit 7: Distribution of Slot Machines in the United Kingdom, 2011


Average Number of
Venue Type Machines Number of Venues Total Machines
Individual pubs 3.4 51,300 174,912
Betting shops 4.1 8,862 36,437
Managed pubs 5.2 8,700 45,368
Bingo clubs 33.0 641 21,213
Gaming and entertainment centers 40.0 951 38,147
Casinos 100.0 145 14,541
Other 3.3 50 165
Total 70,649 330,783

KELLOGG SCHOOL OF MANAGEMENT 13


This document is authorized for use only in Siddharth Srivastava's SG EMBA/ Marketing Audit at S P Jain School of Global Management - Dubai from Jun 2018 to Dec 2018.
ROYAL REELS KEL723

Exhibit 8: Revenues for UK Slot Manufacturers (£ in millions)


2003 2004 2005 2006 2007 2008 2009 2010 2011
Generation Slot Machines 327.9 338.0 351.6 361.9 335.3 355.4 370.4 388.0 406.0
Games Online/Mobile 6.3 6.3 7.5 8.8 9.0 9.4 9.8 10.0 10.4
Slot Machines 259.3 264.9 272.4 283.9 258.5 269.1 279.0 290.2 301.8
Royal Reels
Online/Mobile — — — 7.0 11.4 74.4 157.5 248.0 300.1
Slot Machines 84.1 91.3 93.2 97.8 102.2 123.2 148.8 178.5 205.4
Dexteira
Online/Mobile — — — — — — — — —
Slot Machines 264.8 274.6 284.4 296.4 271.7 279.3 287.9 294.8 309.4
Other
Online/Mobile — — — — — — — — —

Exhibit 9: Distribution of Slot Machines of Competitors in the United Kingdom,


2011 (000 machines)
Generation
Games Royal Reels Dexteira Other
Pubs and betting shops 53.0 71.1 46.0 86.6
Casinos, clubs, gaming centers 52.1 16.9 2.0 3.1

Exhibit 10: Slot Player Gaming Frequency in the United Kingdom, 2011
Average Three Average One Day Average One Day Average Six Days
Days per Week per Week per Month per Year
Percentage of players 7% 13% 23% 57%
Average number of spins
100 50 25 25
per day of playing

Note: Customers playing alone tend to play about 100 games per hour, while those playing in a social situation tend to play 50 games per
hour.

Exhibit 11: Slot Player Gaming Preferences in the United Kingdom, 2011
Digital/Touch
Traditional Fruit Screen Fruit
Machine Machines No Preference
All 68% 18% 14%
Male 64% 21% 15%
Female 74% 15% 11%
18–24 63% 26% 11%
25–34 69% 17% 14%
35–44 71% 15% 14%
45–54 70% 15% 15%
55+ 68% 8% 24%

Note: Sample = Respondents who said they played or were interested in playing slot machines.

14 KELLOGG SCHOOL OF MANAGEMENT


This document is authorized for use only in Siddharth Srivastava's SG EMBA/ Marketing Audit at S P Jain School of Global Management - Dubai from Jun 2018 to Dec 2018.