In 1894, from a small, cramped workshop in San Francisco, Charles Fey designed a simple and seemingly unremarkable mechanical device, dubbing his invention the "Liberty Bell." Fey sold the first of his machines to a small bar and restaurant in Reno, Nevada for the princely sum of $2. These were humble beginnings indeed for what would soon become one of the world's most profitable and popular products.

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Within a few years of creating and selling that first machine, Fey's invention had proved so popular, in fact, that he was unable to make enough machines to satisfy demand. By the early 20th century, manufacturers the world over were beating a path to his door, trying to buy licensing rights for Liberty Bell.

The Liberty Bell was, of course, the world's first slot machine. Fey designed a simple coin-operated machine with three spinning reels. Each reel contained pictures of hearts, diamonds, spades and a cracked Liberty Bell modeled after Pennsylvania's most famous landmark. The machine accepted only nickels and paid out a pre-set amount when different symbols lined up on the reels. The jackpot: 50 cents for three Liberty Bells.

Slots proved a popular addition for bars, restaurants and clubs but didn't hit the casino scene in a big way until roughly four decades later. It was then, in the late 1940s, that famed casino tycoon Bugsy Siegel was looking for a way to occupy women accompanying primarily male gamblers in his Flamingo casino in Las Vegas. Enter the slot machine: The Flamingo's first machines were similar to the old Liberty Bell -- simple mechanical devices with three spinning reels.

But slot machines are no longer just a simple sideshow to Craps, Blackjack and Poker or a barroom diversion. Rather, slots have become the main attraction in most casinos. In fact, by the late 1990s slot machines already accounted for roughly 70% of the average casino's total winnings. Even better, slots are largely unmanned and don't require additional expenditures for dealers or croupiers.

And modern technology is making slots ever more popular for casino operators. Microchips, electric reels and even video displays gradually supplanted Fey's mechanical reels by the 1990s. Nowadays, some slots are even hooked up to machines at casinos hundreds of miles away via a secure network.

All this modern innovation has served to dramatically increase the variety of slot machine games available to bettors. Some of the most popular machines these days are multi-jackpot systems that combine the contributions of thousands of slots located at different casinos into a single, huge jackpot. These jackpots often run easily into the millions. Also popular are machines based on various movie themes or popular card games such as Poker and Blackjack. Newer, even more entertaining games continue to attract more gamers to the machines.

But casinos aren't the only companies that are making a fortune from the popularity of slots. The slot machine manufacturing industry is also well positioned to benefit from growing slot machine revenues. This industry is an attractive one for investors for a variety of reasons, including:

• High barriers to entry -- Slot machines must be tested thoroughly and must comply with local and state government-imposed licensing regulations. Smaller players would have trouble competing with incumbents due to the high costs of complying with such strict regulations.
• Non-Price-Sensitive Customers -- The amount casinos pay for a machine pales in comparison to the winnings a casino can bring in from a machine in just a few short weeks. As such, casinos don't mind paying a premium price for more popular, well-known machines.
• "Leased-Machine" Business -- Traditionally, slot manufacturers have made money by simply selling machines. Increasingly, however, they're sharing in the profitability of the machine itself by leasing the machines directly to casinos in exchange for a percentage of the wagers (or casino winnings) from those machines. This provides slot machine makers with a more consistent, stable revenue stream -- one that's less dependant on casinos constantly replacing machines and ordering new machines.
• New Jurisdictions -- More and more locales are being opened up to casino gaming. In addition, slots are now finding their way into racetracks and off-track betting facilities -- areas where they've been traditionally banned. This should continue to fuel solid growth for slot machine makers in the coming years.

Better still, most stocks in this industry are now trading at a significant discount to their 2004/05 highs, handing investors a great opportunity to invest at far more attractive prices. The culprit: a temporary lull in new jurisdictions opening up to slot machines. What's more, back in 2003/04 casinos spent big on new machines, switching from coin-operated slots to cashless "ticket" machines. With that enormous upgrade cycle now largely complete, many casinos reduced their spending on new slot machines throughout 2005.

This slowdown will prove temporary. For starters, during 2006 several new markets are likely to open up for slots -- this will clearly spell new demand. Secondly, slot machine leasing contracts are gaining in popularity. Under these contracts, the manufacturers are no longer reliant upon the casino replacement cycle. Revenues from such contracts are spread out over time, allowing the manufacturers to continually profit from their machines.

The slot machine industry is relatively concentrated in the hands of a few well-established players. In the table below, I offer a list of the key players in the industry. And in the text that follows, I'll highlight two of my favorite plays on the booming slot machine business...

Editor's Note:  Throughout the remainder of this article, StreetAuthority.com founder Paul Tracy and his staff provide a closer look at several of today's leading slot machine stocks. To view the remainder of this article, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue...

-- Paul Tracy
Editor
StreetAuthority Market Advisor

Paul Tracy founded StreetAuthority and became Editor in Chief in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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