AGI on the comeback?

Hi guys

I thought I'd post a few thoughts after discussions with various parties at AGI over the past six months or so starting with the AGE.

Firstly, we all know AGI's performance has collapsed in Australia in recent years. And we all know the culprit: Aristocrat's Lightning Cash/ Link and then its Dragon Cash/ Link machines. But just why have these two sets of games from Aristocrat been so successful?

Like movies, pokie games are successful often due as much to luck as to their producer's skill.

However, according to Kieran Powers at AGI, Lightning Cash was revolutionary in that it increased the average return-to-player (RTP or the percentage of every $1 that you wager that is ultimately returned to you) on the typical floor from around 88-89% to 90-91% (these figures might be slightly out but the important thing to note is that the average RTP has increased on floors due to Lightning and Dragon). Lightning & Dragon achieved this by having two features rather than one, which reduced the "hit rate" (or the average number of spins you have to play before you win something) compared to both previous Aristocrat games and its competitors' games. Obviously players noticed this and combined with their large jackpots, basic psychology tells you why Lightning & Dragon have been so successful for so long.

And while the average RTP on your typical club or pub floor rose (which all things equal, makes the pokies less profitable to the club / pub), the large increase in turnover due to the sheer popularity of the Lightning and Dragon machines more than compensated, thereby increasing the floor's profitability. Which of course is why your typical club or pub floor is now dominated by Lightning and Dragon machines.

Unfortunately, though, for some reason floor managers concentrate on their floor's RTP & ignore (or at least downplay) the increase in turnover which, as I said, more than compensates for the rise in RTP. In response, they apparently pressured AGI to produce machines which offered lower RTPs (and which also offered lower jackpots to boot!) to try to bring the average RTP down on their floors. AGI complied (perhaps because they were looking for a short term fix rather than being willing to say no and run the business for the long term) and of course, players noticed this, refused to play AGI's machines and well, this is a major reason why AGI's performance in Oz has been so bad over the last five years.

In other words, if you believe AGI (and of course one should remain sceptical of post hoc explanations), up until Kieran Powers started at AGI the company had pursued a self-defeating strategy in Australia against its mortal enemy Aristocrat. In hindsight - I bought my first shares at around $3.10 in 2014, unfortunately - this is probably why Len Ainsworth sold his stake to Novomatic. He probably figured it would be many years before AGI would be able to turn performance around here, if at all.

Anyway, one of Kieran Power's first orders of business was to remove this self-defeating strategy and refuse to produce machines that had a lower RTP (and lower jackpots) than Aristocrat and others. First cab off the rank was Golden Cash, which unfortunately hasn't really done that well since launch (there are no guarantees in the pokie business).

The other major strategic change was to move away from primarily targeting your typical hard core, low denom, low volatility players that tend to frequent clubs rather than pubs and who are content with just putting $5 or $10 in a machine to have a bit of fun after work and maybe win something in the process. This is why AGI has traditionally always been much stronger in clubs than in pubs.

Instead, AGI now wants diversity of content and to replicate Aristocrat by having games for all segments of the pokies market.

One example is Kanga Cash, which is a competitor to Aristocrat's Big Red and other high volatility, high denomination machines which have always tended to do well in pubs, where the typical gamer bets more than in the clubs. "Very high in volatility" per AGI, unlike Big Red et al, Kanga Cash has two features rather than one, which reduces the hit rate from around 1 in 140 for your typical high denom machine to around 1 in 70-80. And its RTP is around 92%, which is higher than competitors' machines.

In other words, Kanga Cash is an attempt to beat Aristocrat at its own game. While it is still early, it appears to be doing fairly well (as another poster recently noted).

And in terms of the lower denom machines, Crazy Jackpots has been created using a similar logic. Like Lightning and Dragon, it has two features, which makes its hit rate around 1 in 17, around the same as Lightning and Dragon. Unlike Lightning and Dragon, however, the features don't include a hold and respin feature so it's a bit different (which I like, as Golden Cash seems to be very similar to Lightning & Dragon and, in my view, is perhaps why it hasn't been much of a success). Again, it is still too early to see whether this game is a success.

In summary, the takeaway is that AGI has dramatically changed its strategy in the past year or two. Like anything, there are no guarantees and any improvement in performance will take time. However, given AGI's travails in recent years have almost solely been due to abysmal performance in the higher margin Australian market, this strategy change is encouraging to me.