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Video lottery distributors furious over machine upgrades

CHARLESTON, W.Va. -- After spending nearly $70 million in 2011 to obtain 10-year Lottery licenses, video lottery distributors have been outraged to learn they will now have to spend between $21 million and $100 million to replace or upgrade their slot machines or have them become useless after 2017.

About 100 operators vented some of that anger at a Lottery Commission informational meeting Tuesday at the Charleston Civic Center.

Lottery Director John Musgrave said the issue is that most of the more than 7,000 limited video lottery (LVL) machines operating in bars and clubs around the state use an obsolete computer protocol to allow the machines to communicate with the Lottery's central computer.

Video slots manufacturer IGT notified the Lottery that it would no longer use that communications protocol after Dec. 31, 2015, but after negotiations, they agreed to extend that deadline to Dec. 31, 2017.

Unless the LVL machines are upgraded at a cost of about $3,000 per machine, or replaced with new machines that cost $20,000 to $30,000 each, the distributors' investments in the 10-year licenses will be essentially worthless after that deadline.

"We recognize the hardship this is going to cause for practically 90 percent of the machines that operate in West Virginia," Musgrave told the audience.

"We know the seriousness of this issue," he added. "We wouldn't be here, or asked you to be here otherwise."

"This hit us like a ton of bricks," said George Carenbauer, lawyer/lobbyist for the West Virginia Amusement and Limited Video Lottery Association. "It's like buying a fleet of diesel trucks and being told two years later you have to convert them all to run on natural gas."

Not all the video lottery distributors Tuesday were so restrained. One yelled out that many of them had taken second mortgages on their homes to pay for the 10-year licenses - at an average cost of more than $9,000 per machine - and stated, "You can't cut them off halfway in the middle, and say, now you can go broke."

Several distributors asked whether the Lottery could provide financial relief, either by waiving the annual $1,000 license fee per machine, or by lowering the state's 50 percent "tax" on all LVL revenues.

Musgrave said that would require legislative action.

"I cannot change the legislation," he said. "It's not up to the Lottery. We follow the legislation given us."

Distributor Herk Sparchane asked whether the Legislature would offer matching funds for the LVL machine upgrades - as it did in 2011, providing up to $10 million a year of matching funds for 10 years to allow the state's four racetrack casinos to upgrade their video slots and gaming areas.

"I think we're entitled as West Virginia citizens to get some help, instead of the four out-of-state casinos," he said, referring to out-of-state ownership of those properties.

Several distributors questioned whether Lottery officials were aware the limited video lottery machines were on their way to becoming obsolete when the 10-year licenses were being re-bid in 2011.

Musgrave said Lottery officials had absolutely no indication at the time that IGT planned to phase out the old ICIS protocol, which is currently used for video slot systems in West Virginia and Louisiana only.

"We knew nothing about IGT's decision to end that protocol before we bid these licenses out," Musgrave said.

"It's an outdated protocol. It's an antique, and our industry needs to move forward," he added.

Carenbauer also said he believes that, under its 10-year LVL manufacturer's license, IGT has an obligation under state Lottery law to maintain continuous operation of all LVL equipment throughout the 10-year period, and could be required either under administrative edict or court order to continue to operate using the old protocol through 2021.

Reach Phil Kabler at philk@wvgazette.com or 304-348-1220.


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