Nevada’s outsourcing of slot testing likely to benefit manufacturers

Manufacturers of appliances and light fixtures often send their products to independent labs that test consumer products for safety using standards set by groups such as Underwriters Laboratories.

Slot machines and other high-tech forms of gambling equipment aren’t like toasters or floor lamps. They are more complicated — and crucial to the economy of places like Nevada, where principles of gambling fairness and integrity form the bedrock of the multibillion-dollar gaming industry that funds nearly half of the state’s budget.

It follows, then, that vetting gambling equipment is a key function of the state Gaming Control Board.

Before a new slot machine or other game hits the casino floor in Nevada, it undergoes a battery of software and hardware tests in the Gaming Control Board’s technology lab. Among other things, engineers will test a slot machine to make sure the device selects a random outcome while playing according to the stated probability of winning a jackpot — figures that aren’t public, but are known to the manufacturers and casinos that offer the games. Mathematicians vet table games to determine the accuracy of published odds — ensuring that, over time, the games aren’t losers for casinos and, by extension, the state’s tax coffers.

A law created with the industry’s and its chief state regulator’s support makes history by allowing manufacturers to use independent labs to test slots and other gambling equipment for use in Nevada.

Industry representatives say the move will allow companies to bring a higher volume of more advanced technology to market more quickly, as privately owned labs with more flexible budgets and fee schedules can ramp up or contract staff as the market dictates.

Private labs aren’t necessarily faster or cheaper than Nevada’s. But some experts say the ability to use private labs whose testing services are already recognized by other states and countries will streamline the regulatory process, resulting in a savings of time and money.

Outsourcing a task so crucial to the state’s economy and image might sound like a travesty, and indeed previous regulatory regimes in Nevada refused to consider it.

Control Board Chairman Mark Lipparelli took a different view.

Maintaining a full-scale testing facility was more of a political decision than one that made sense for the state or the industry, said Lipparelli, a former executive with slot and systems manufacturer Bally Technologies who joined the board in 2009.

Nevada is one of only a handful of U.S. states that maintains its own testing lab. Most states — as well as countries in Europe and Asia where gambling has long been part of the landscape — outsource gambling testing to independent labs whose standards are recognized and approved by government regulators.

Still, questions abound.

Would shifting work to independent labs make the state’s widely respected testing lab — one known for maintaining some of the industry’s toughest standards — obsolete? Would capitalist pressures force private labs to cut corners?

Lipparelli said he wants to shift the state lab’s grunt work to private labs while hanging on to more complex jobs, such as Internet gambling and mobile gambling devices. The routine work — which also takes up the bulk of the lab’s time — involves testing new slot games. These are typically adaptations of existing games and aren’t as difficult to vet as the software platforms that run the games.

That will free up state employees to focus on big picture items that aren’t getting much attention today, including the increasingly complex systems that run casino floors and computer server hosting centers, Lipparelli said.

In the era of budget cuts, the state lacks the money to train its employees to keep up with fast-moving technology or hire additional expertise, Lipparelli said.

“Unless the state changes its resources, we could fall further behind,” in the technology arms race, he said.

The Control Board has some experience with outsourcing: To keep up with demand, the state farmed out testing on ticket-taking slot machines several years ago when casinos began phasing out coin-operated machines.

Although it’s not known whether manufacturers will choose to abandon Nevada’s test lab in droves, regulators are discussing how much control they will assert over the submission process. More important, Lipparelli said manufacturers, under the new regime, will be required to meet the same standards as before.

Independent labs must be able to meet Nevada’s testing standards before state officials will sign off on any results, he said.

As a result, the Association of Gaming Equipment Manufacturers, a trade group representing more than 100 technology and manufacturing companies around the world, says it doesn’t anticipate any less scrutiny of the machines tested for play in Nevada.

Many labs and other gambling states have adopted testing standards similar to Nevada’s “industry gold standard” over the years, association Executive Director Marcus Prater said.

Unlike most consumer products manufacturers, makers of gambling equipment deal in a patchwork of state regulations and test their products in government and private labs. The process has been greatly simplified as casinos have spread over the years, and most states allow manufacturers to test their equipment once in a private lab before selling it in multiple states.

The group supported the legislation primarily because of the savings from Nevada not having to retest a product that has gone through an independent lab, Prater said.

After streamlining the approval process and building a lab a few years ago, Nevada tests equipment in a timely fashion, he said. The state opened a 15,000-square-foot testing lab in Las Vegas four years ago.

Still, because of the state’s fixed staff and budget, companies “dribble their products through the system” rather than pushing products as fast as the market can bear, he added.

Although the new lab rules may make business sense, it may not be hugely popular among employees whose future seems less certain.

In an email to state assemblymen in April, Craig Dalebout said a shift from direct testing of games and systems to more of an oversight role could weaken the state’s grip on the companies it regulates, resulting in lax compliance and shrinking state revenue from gambling taxes.

It could also lead to a “brain drain” of skilled workers from Nevada, as private labs may simply use their existing staff rather than hiring state workers or rely on expertise in the other countries where they operate, said Dalebout, an auditor for the Control Board.

Dalebout said he expressed his opinion as a concerned citizen and industry expert and not as his employer’s representative.

Lax regulatory oversight has certainly contributed to the Great Recession’s ills. There are plenty of local examples, as well. Private inspectors hired to inspect the Strip’s Harmon hotel for Clark County, for example, lacked the relevant experience and missed several floors of errors that resulted in costly fixes, an empty, unfinished building and major litigation.

But gaming observers say there’s less room for error in their industry, dramatically evolved from its shady past and with strict financial controls with no parallel in business. Although it’s not unusual for software glitches to surface during actual play after a slot has left the lab, the major gaming labs aren’t known for high-profile screwups.

“I can’t think of any technology scandals involving independent labs that compromised the entire industry — and that would have been prevented by a Nevada stamp of approval,” Prater said.

There is industry agreement that the private labs testing games for most of the world’s casinos “have done a good job and are perfectly capable of performing these functions,” Lipparelli said.

The change will bring some unknowns, however.

With game testing shifting to private labs, some Control Board employees will lose their jobs. It’s not known how many, and some workers have left in anticipation, Lipparelli said.

By reducing the testing work flow and the state’s administrative costs, revenue the state collects from the testing process is also expected to decline under the new regime. Regardless of whether they use outside labs, manufacturers will pay fees to the state to offer their games here, regardless of whether they use outside labs, however, Lipparelli said.

In the long run, Lipparelli said, the move is expected to help the industry move away from an overly confusing bureaucracy of local testing approvals and toward a common, global testing standard that benefits gamblers and manufacturers alike.

“That’s the Holy Grail,” he said.