KGM Gaming takes diverse approach to online gambling

When New Jersey launched online gambling in November, almost all of the industry participants came from other countries, where online gambling has long been legal, or from Las Vegas, the epicenter of the U.S. gambling industry.

KGM Gaming, a Philadelphia company started in 2004 to distribute slot machines in Pennsylvania, is trying to change that.

KGM licensed games from a Nevada software developer and struck a deal to have the games included in online casinos operated by Caesars Interactive Entertainment Inc.

That will give privately owned KGM a cut of casino winnings from games on the Caesars sites.

KGM officials declined to disclose details of its arrangement with Caesars and said that predicting when the online effort would be profitable was a "tough moving target."

"What's more important to us is that we are there at the start of a business," referring to online gambling in the United States, said Howard Weiss, KGM's chief executive. "We're very, very confident. This is not an industry that will go away. The industry will grow."

KGM's games, which it is paying Spin Games L.L.C., of Reno, to distribute in New Jersey, are expected to go live this month, a Caesars official said.

On Wednesday when New Jersey releases revenue data on the second full month of Internet gambling in the state, the Coalition to Stop Internet Gambling - a group supported by Sheldon Adelson, CEO of Las Vegas Sands Corp. - plans to announce that it has grown to a 39-member organization.

For Weiss, whose companies include Transcor Inc., a logistics and warehousing firm in Philadelphia, the move into online gambling is another example of pursuing opportunity created by legislation.

That's also what happened when Pennsylvania legislators legalized slot machines in 2004. The law included a controversial provision requiring casinos to buy slot machines from Pennsylvania distributors.

That's what KGM - originally Keystone Gaming Machines - was set up to do. Weiss said that from the beginning: KGM was a real business, not just a storefront.

Long after Pennsylvania legislators effectively eliminated the requirement that casinos purchase slot machines from Pennsylvania distributors in 2006, KGM is still around. It kept its original multiyear contract to distribute slot machines for Aristocrat Technologies Inc. until the contract expired.

KGM still distributes some slot machines, but it diversified into manufacturing wooden bases for slots and specialized seating for slots.

"Just before the first of the year, we shipped our first seating job in Vegas. We have shipped into most jurisdictions, including Canada, throughout the United States," said Jason Peters, who was recently promoted to president of KGM.

Weiss and Peters were returning from an industry conference in London a year ago when they learned that Gov. Christie was expected to sign a bill making Internet gambling legal. That was the trigger for them to pursue what they see as the next frontier in gambling.

Weiss knew his eventual online partner, Kent Young, the founder of Spin Games. Young was an executive at Aristocrat when KGM had the distribution contract in Pennsylvania.

As to why Young would enter the New Jersey market through KGM rather than going in directly, he said: "We did it jointly because we think both parties bring certain things to the table. We're a technology company, so we're very much focused on developing the technology, where KGM is obviously very good at distribution, service, and support and maintenance."

It's a good combination, said Pierre Cadena, Caesars vice president of corporate development, because it allows Caesars to diversify away from the traditional suppliers of slot-machine games, who are adapting their games for the Internet.

"Spin Games are very innovative," Cadena said. "They started digital only, and it was a unique combination because KGM certainly was a player on the distribution side of land-based, so it was very familiar with the licensing regime."

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