THE WHEEL OF FORTUNE

At a hearing by the United States Congress into gambling, the most compelling witness by far was Leonard Tose. He reckoned that he had lost about $40 million through gambling, or it might have been as much as $50 million. He couldn't be sure. The money had seeped away gradually though consistently, sometimes no more than $10,000 during a frugal night at a casino, sometimes as much as $1million. But he had vast winnings too. He recalled times when everything went his way. The dollars rolled in obediently. He felt he could not lose. Such moments kept Mr. Tose going when fortune seemed to have deserted him. In one bleak run of ill-fortune he lost 72 nights in a row. A lesser man would have given up. A lesser man would probably have managed to hold on to at least some of his money.

There was nothing stupid about Leonard Tose, a big spender who died in April 2003, aged 88. In many ways his was the classic American success story. His parents were immigrants from Russia who had settled in Philadelphia. Mr. Tose told stories of his father selling goods from a pack on his back and saving up to buy a truck. From modest beginnings the son built up a business of 700 trucks whose logo became familiar throughout the United States.

The politicians who listened in fascination to Mr. Tose's account of how to lose money quickly were trying to understand the nature of gambling, and whether it should, or could, be controlled. Mr. Tose was asked if he had any advice for Congress. “Don't drink when you gamble,” he said. It sounded obvious, but it drew attention to the practice of some casinos that provide big-spenders with an unlimited supply of drink.

In various countries in the rich world similar inquiries are going on. In America and other liberal societies, a strongly-held view is that if you want to gamble, it is no business of the government. However, the consensus is that gambling is increasing, but little can be done about it except to provide counseling for those unkindly called “pathological” gamblers. The good news for governments is that gambling, though routinely deplored, is easily taxable, like its sinful sisters drinking and smoking. State lotteries are promoted as a good thing.

Over the past 30 years, America has developed a gambling addiction. Once confined to Nevada and New Jersey, the gaming industry has spread with remarkable speed and efficiency throughout the world’s riches nation. Covering the waterfront from casinos to state lotteries, horse-racing to boxing and ball games, bingo to the stock market, gambling is everywhere in America – in churches and synagogues, offices and homes, and most recently on Indian reservations, subject to their own separate laws.

One of the lures of gambling is its simplicity. The apparatus of a casino, the roulette wheels, the slot machines, require little technological skill. Mr. Tose favored blackjack, similar to pontoon, a children's game. The player has to be able to count up to 21 but it is otherwise undemanding. Casinos draw substantial portions of their revenue from heavy betters at low-stakes games, in particular slot-machines, which generated $25 billion for U.S. casinos last year, twice the take from the table games.

Slots haven’t evolved much since they started going digital in the early 1990s. Even now the graphics and sound in a $12,000 slot machine pale beside those of a $300 PlayStation 3. Indeed, the latest digital machines still use random-number-generating microchips that are decades old. But the biggest change the slots industry has ever seen is coming soon, thanks to a tiny part on the back of every machine: the networking port. Much as Ethernet changed PCs from stand-alone terminals to local networks and broadband Internet changed everything else, the full-scale networking of the slot machine will reshape the largest profit stream in the casino business.

Networked slots began appearing in the late 1990s, but they were crude with casinos linking banks of machines over secure phone lines and sometimes networking slots from other casinos in different cities. Also, casinos used networks to monitor activity. But the networking didn’t go two-way until 2006 when the Nevada Gaming Commission changed its rules to allow casino operators to use a central computer to change a game’s theme, denominations or payout percentages with a few mouse clicks. Previously, casinos had to open up each cage and program the read-only memory module by hand.

Testing has now begun on networks that push games and information out to slot machines, allowing a nearly unlimited array of moneymaking choices. While the house take falls within a band spelled out by state regulators, typically between 4% and 6%, casino’s can switch games and odds based on time of day, overall floor activity or even personal information pulled from the player’s loyalty card.

A company we profile in the Insider Moves blog has largely spearheaded server-based gaming, which will revolutionize the layout of a casino’s floor space. Its solid lineup of new products, gaming expansion, and new technologies is transforming the industry. Investors willing to take the additional risk and hold the stock for the long term will be handsomely rewarded.