What is the future for coin-op distribution in America? Profit margins on selling equipment have dropped already due to fierce competition among distributors nationwide. Margins will drop farther as the Internet business model moves further into the coin-op industry. As operator and location game sales make up less and less of distribution's profitability, service becomes more and more important.
Fortunately for distributors, the need for service will actually grow in the future, especially service to small operators in the digital age. Take music licensing as an example. Big operators may be able to handle complex licensing requirements on their own, but small operators would probably rather hand over this chore to a trusted distributor (or to the AMOA for that matter) rather than a competitor like another operator (or a manufacturer). Operators don't want to turn over their location lists any more than casinos want to give out home addresses and phone numbers of their "high rollers," but to get downloaded digital programming - whether by satellite or wire - this may be necessary. Wouldn't you rather provide this sensitive data to a trusted distributor who already knows your credit, your buying history and your other confidential financial information? I think most operators would view this as the least of all evils.
The increased stress on service is already a trend among leading distributors. I believe distributors should expand their service capabilities from games to computers. They could fix everything from hard drives to printers and monitors, not only for operators but for clients outside the industry. This represents a growth opportunity in an era when Internet sales will increasingly take over parts and games sales. But let's not forget that critical service of "financing" that distributors still play a major role in.
Because service and diversification are so important to the future of distribution, I agree with those trade members who believe that a further shakeout is coming on the distribution level. Small distributors can't make it selling just games and some of them have already disappeared. You have to be fairly large to offer sales and financing, parts and service, etc., and it helps to be vertically integrated with a route of your own - especially when you can take full advantage of that short window of top profitability for each new game. But the game runs are too small now and there is only a "first tier" of orders to fill...no second tier. This is because, as I've written before, today's games are good but for the most part they don't bring in new players or increase location grosses. We have been doing the "cashbox shuffle" for several years now and had we copyrighted it as a song, we could be receiving royalty payments.
Consolidation is another factor pushing the small distributors out and leading to a reduced number of mega-distributors. There are two reasons for a manufacturer to use distribution: first, to get paid (distributors can collect the money from operators) and second, to provide parts, service, and financing. If big regional operators can do this, or if the Internet can take over some of those functions (like stocking thousand and thousands of parts), the factory is tempted to "go direct" to the big chains and the big operators. The distributor's role is accordingly reduced.
To survive and thrive, distributors must concentrate on "adding value" to sales and service. They can do this by providing business leads to operators, good deals, free prototype test equipment, backup parts kits, reasonable trade-in prices for used equipment, service seminars, new opportunities, whatever it takes to make the customer happy. What else could distributors do for operators? Plenty! Learn to buy worldwide closeouts and offer cut-rate pricing to operators. Learn the operator's route so you can help plot equipment buying strategy (the best distributors already do this). Coordinate and sell local advertising for those games that are networked and prepared to add another revenue stream for operators.
I believe distribution's role will change in the future, but they will always have a role. There will always be a need for financing, a need for service (especially for small or new operators). And there will probably always be a class of operators with no known phone or address whose only point of contact with the industry is their local distributor. There is still a class of operators who don't attend national shows, preferring to visit their distributor instead...and they will probably always be part of this industry, too. To sum up, distribution's job is harder these days and more complicated...but still viable. There are many other roles that distributors can perform and the smart, progressive ones are already moving that direction. Let's hope that most will take the necessary steps to retain their market share of our industry.
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