So You Want To Open Up An Arcade: What About “Profit-Sharing”?

Among articles people said they liked reading on the site, stuff that hits the “inside baseball” string of the industry seem to be of high interest. I have people asking me about this particular subject all of the time and I realized I don’t have a post specific to it so may as well write it down for people to find online.

UPDATE: For arcade rentals, jump to the bottom of the post.

It seems there are a lot of people out there right now that want to jump into the business of running an arcade. That’s great – I’ve been at the same point where I was just a “dreamer”. Getting all the research done was a bit of a pain as information didn’t seem to be widespread enough to help me move beyond that stage. A couple of the operators and distributors that I contacted offered some good advice while most mocked the idea when I mentioned that I wanted to do video-only (it was kind of a “redemption is the hum-diggity” response, anything else was crazy talk; which I can understand to a degree). Despite that I forged ahead with a business plan and while it was far and away from perfect, it still was a plan. If you are in the initial stages of starting an arcade, you should do the business plan part even if it seems silly – if you can’t wing that then running the business is a larger challenge so good luck and don’t say that I didn’t warn you to plan. There will come a point in your planning where you will come across the question – how should I get the games? That is what I will tackle here for this post.

The ‘straight-forward’ way to get equipment is to buy it outright. When you start visiting distributor websites however something will click very quickly for you:

“This stuff is really expensive”

The average cost of a new video arcade game is about $7500. With a renewed focus over the past couple of years on games for FECs, that has gone up. That doesn’t include freight or taxes so that can all add up even faster than you expect. Of course one work-around is to go with the older stuff but the catch is that those games require more maintenance and they aren’t the money makers that they used to be in most cases. I seem to confront this idea a lot: “classics like Ms. Pac-Man are uber popular right now, we’re gonna make bank!” Well, not exactly. Classics can do well when you have huge quantities – at least 50+. 100+ if you want to turn heads. But keeping all of those games which are 30+ years old is no easy task, that will cost you money and time and you will quickly find that people don’t tend to replay 30 year old games like they used to. Many classic arcades out there will charge an entry fee and put the games on free play but there still will be games that get ignored and others will have to pick up the slack to pay your bills. That is why I suggest investing in new – yes it is expensive but they have the potential to have the same earning power as 20+ classics. I’m not making this up for fun, or because I hate classics (on the contrary, half my arcade is made up of games from the  it is what I have seen while operating one of those “dead” video-only traditional arcades in a mall for the past 6 1/2 years.)

I still can’t afford it. So are there other options?

Most distributors will have leasing or financing programs. Sometimes those terms are used interchangably, sometimes not. These will vary as to their functionality but keep in mind – if your personal credit sucks then you will likely be rejected or you will have to face some stiff interest rates to get the equipment you need. Sorry to be blunt about this,  it is just due to simple risk assessment. If you have no experience running a small business and your personal finances are in shambles then you won’t be taken seriously (this is even more true if you can’t show the discipline of putting together a business plan) or just outright denied. That doesn’t mean that you need to give up but if that is the situation in your, case then shoring up your financial knowledge would be a good idea before you take the full plunge into any business.

Now you might have heard about another option out there that sounds very attractive as on its face, it sounds very low risk. Called profit-sharing or revenue sharing, it is an option but a misunderstood one from what I have encountered.

Profit sharing is usually handled by a business called an operator. They can go by some name variations including game/route/street/vending operators and they are usually small businesses like yourself. On occasion a distributor will try doing local operations but for the most part, distributors handle sales, operators handle the rev. shares/rentals. They probably have a few machines, maybe a dozen or more if they have found success and have grown. Being small businesses, they will have geographic limitations too – the chances of you finding an operator with a nationwide reach is very low. The closest I have heard of is Namco Cybertainment but I am not sure of what their capability and coverage is at right now.

As such there will be variance as to what the operator can provide. One thing I have encountered often is the expectation of the new business owner is to find an operator that will stock their standalone arcade/redemptioncade with 100% of the games, making it so they have practically no risk. This expectation is not realistic for the instance of your business being nothing but an arcade but I am surprised at how often I come across it. It does make sense in instances where your primary business is something like a restaurant and you just want to have a small game room working on the side. Arcade games can work in any business where there is a waiting space really, which is why movie theaters and even dentist offices have games.  But expecting to have someone manage and stock an arcade of 40+ games when all you are providing is a building, and there is no other aspect or attraction to your business, doesn’t make a lot of sense from the perspective of the operator(at least to those I have worked with or talked to). Then you would be managing a landlord business, not an arcade, which would make even less sense if you are renting the location yourself instead of owning.  Operators tend to have their equipment spread out instead of being concentrated as that is a business model that has worked for them. If they wanted to rent out a place for an arcade then they probably would have done so already, in fact I knew an operator in my area that did that at a different mall for a short time.

So what can I do if I’m interested in going this route?

If you are wanting to just run an arcade, then what might work is for you to purchase some games and if an operator is available, work with them to bring a few titles in that way. As I don’t care about redemption, I have worked with an operator that does want to do that and another that likes to setup new games, which has allowed me to offer a few more new items in my place that I otherwise would not have had the capital to grab. For a short time I split with a guy on some classic games he had but it ended up being better for me to buy them outright. At one point I had four different people wanting to operate at my location but it felt like too many hands in the cookie jar so to speak so I scaled back. From that experience I have my doubts that if I was splitting on every single game that I would be covering all of my bills, so it is nice to have 100% of the profit on most of the games, although that does mean that 100% of the repairs on the games I own are my responsibility to figure out (there are many resources online to help with tech work though as well as people who make it their business to fix games).

That is the other aspect of operations that entice people – since the op owns the equipment, they are responsible for fixing it. This can be a good or a bad thing – if you have a good responsible operator that cares about their equipment (most do), then they will stay on top of that and be out to your place to fix something quickly. But I have heard from existing arcade or bar owners who have a bad operator that never comes in when they need them so they decide that they want to move over to owning 100% of the equipment. As I said, most operators are good as they know that if they slack on this and lose their operations then that will put them out of business. That tends to be good incentive on the customer service side of things.

What can I expect for splits?

This is something that can only be answered by the operator you work with but some numbers you will generally run into include 50/50, 60/40, 65/35 or 80/20. Certainly there are other types out there but that is what I have usually seen. Keep in mind that they are going to benefit the operator as 1) they have to buy the equipment which as you already know, isn’t always cheap 2) they have to maintain it and that costs time and money 3) they probably have mouths to feed and they are trying to make some money off of this venture too. Usually you will get a higher split on older equipment since that probably has paid itself off already.

How do I find an operator?

This is the difficult part. I’ve come across some operators because I run this site and on occasion they have reached out to me but I am not aware of an online operator directory. I think trade magazines like Play Meter or Replay might publish something close to that once a year but tracking these guys down can be very difficult. That is because many do not need to advertise their services – they will seek out locations that they think will do well for the equipment they own which doesn’t require radio/TV/online ads to do, just some groundwork on their part. Thus spending cash on ads can be a waste for them. Still, searching online for an operator might bring up some results. Sometimes you might find a phone number posted on an operated machine at a place like a grocery store or a mall.

What about arcade rentals?

Long-term arcade rentals are what we’ve been talking about already but the term isn’t really used like that among operators. Short term rentals are very rare in the industry, unless you are talking photo booths. Some locations or operators might be willing to rent something they have out for a few days but your mileage will vary in that regard, as will the price.

A lot of people start looking for video arcade rentals in the Spring so that they can have something to entertain Summer parties. If you are a home user looking for rent arcade machines then unfortunately this is a tough proposition. There is no nationwide company that handles rentals and finding operators is difficult since many do not advertise their services. The only way I know of in finding a company that might do rentals is to do an online search among local businesses for a game or vending operator. You might get lucky in finding an arcade willing to rent out a particular game but most are not setup to haul the equipment around upon request so it is also not a guaranteed way to get this handled. It is also worth noting that  when I have heard of renting a game, sometimes it can cost you just as much as buying one outright but that varies. Either way there usually isn’t a very easy way to sort this out if it is what you are looking for.

Anything else?

Overall, it is an option to consider if you can find it but in my experience, it is not the risk-free way to launch a new arcade business that some people seem to think it is. I wanted to own an arcade and so I have to own a good majority of the equipment for that to be true. You are not going to find a completely risk-free way to do business, especially in this industry. Fortunately I don’t know of anyone in the industry actively promoting a “no risk” way to go about this, but that perception is out there anyways, for some reason. Either way no matter how you go about building your new arcade business, there is nothing wrong with taking your time to research it out and be as prepared as possible before taking that plunge. What worked for me, may not necessarily work for you.

I would certainly like to hear from any operators about this and get their input in case I overlooked it or they do something differently than the norm I have experienced and heard about.