Gary was married recently, May 10, to Denise Masef, a former TWA airline employee from Birmingham, Alabama. He is on the board of directors of the National Jewish Hospital and National Asthma Center in Denver and is active in several other civic organizations.

STERN: I think the industry is very strong right now. I think those of us who are making pinball machines were worried for awhile about how strong the industry was; but, now that we're also into video games, we can see that the industry is very strong indeed. The distributor is selling a lot of video games, and the operator in most cases is doing very well because of the video machines. But I must say there will always be a place for pinball machines. We have a pinball machine right now that we are testing, Flight 2000, that, from all our tests, shows it earns the kind of money video games bring. The point is the operator needs all types of equipment on his route. He needs the jukeboxes on certain locations. Videos, of course, are very strong. And pinballs are necessary. I think what we'll be seeing now is that a pinball can be made that'll make the kind of money an operator is used to making.

PLAY METER: What special types of problems are you anticipating in the near future?

STERN: Let's start with pinball machines. The challenges are to make a pinball machine that will take advantage of the new technology and earn substantially better, like the video games. With the use of the microprocessor there are a lot of things that can and will be done in the future to make those games more interesting. So we'll have to be able to think of these things in a new way, as to what'll keep the players' interest. The other problem with pinball is a marketing problem. The operator has become, and rightfully so, more inclined to buy video than pinball. And he has hurt himself, especially with the kind of pinball we're beginning to see. We have to see the operator re-educate himself into buying pinball machines. When one person sees the next person isn't buying pinball, he thinks maybe he shouldn't buy pinball either. So I think the pinball market is overdepressed, but we'll see it coming back soon. The video game, of course, is another area we're working hard on. We have our own ideas, and we also have some concepts which we buy from Japan. The challenge here will be to get the best concepts, whether they be our own or are licensed from other manufacturers. We're not going to be limited to the "invented here only" philosophy. There are going to: be more video game manufacturers. People who haven't been in that field are going to try to get into that field. So it's going to be very competitive. Only the best games will sell. The days of selling a fair game ended a long time ago. I think instead of seeing banks of filler games in the arcade, we're going to see banks of the same game all next to each other in the arcade. In music, certainly the challenge is great. We have a completely new production facility to get started. We have what we are convinced is the "Cadillac" of the jukeboxes. We will be producing it shortly. And we have some ideas as far as changing that product. Actually the jukebox hasn't changed since stereo was added in 1962-1963. So there are a lot of things that can be done. The microprocessor offers a lot that can be added to the phonograph that hasn't been done yet.

PLAY METER: Okay, now focusing on the first of these three general topics, would you say that the soft pinball market was created by video games?

STERN: I wouldn't say it's just because of video games. Certainly video games are strong, and that has hurt the use of pinball machines. All operators are aware of this, and many operators have changed the percentage of pinballs and videos on their routes, thus increasing their percentage of videos. But part of the problem is that the pinball manufacturers have not come up with enough new ideas. A pinball machine can be made which will earn as well as a video game, I believe that. The pinball manufacturers are going to work very hard in order to come up with these new ideas. It's probably a little more difficult to come up with these ideas now, but it can be done. I also think the panic non-buying of pinball machines has been somewhat overdone, to the point that operators and distributors have been almost afraid of buying pinball machines because they're buying so many video machines. So things have gotten somewhat out of proportion, and I hope this doesn't hurt the operators when they find out they have too many videos and not enough pinballs on their routes. Certainly he's going to need the pins in there.

PLAY METER: You mentioned a little while ago that operators need a re-education as far as pinball machines. What exactly are you talking about here?

STERN: I think the only way, as a manufacturer, that we can attack that problem is by building great games. I think we're doing that right now. As operators will see, pins will earn the kind of money he is used to making now. That will be the re-education. I don't know if there is any campaign that can or should be done by the factories to re-educate people to buy pinballs. I think perhaps the way we should speak to the operators is in the cashboxes of our games.

PLAY METER. Would you say this turn-around from pinballs to video was a sudden thing, or did you see indicators of this turn-around?

STERN: I'd say it was very fast. Maybe as we look back, we should have seen it happening a little more quickly. But I think it was very fast.

PLAY METER: What indicators, would you say, would have shown pinball was headed for a downturn? STERN: I think there was over-production and discounting, and a general reduction in demand. But you've got to remember this is a business of peaks and valleys. We're in a style business; so it's not unusual for one item to become more popular than another. We've seen video games become very popular before, when they first came out. But there is only so much money to be spent on games, and only so many spots on a route to fill. When videos were strong before, we saw pinballs suffer. This is a style business, and so by its nature, it's going to have those peaks and valleys.

PLAY METER: Is this why you got into video game production?

STERN: We have always been planning to get into video games, not just as a sideline, but as a major product line for us. We have always wanted to be a full-line supplier for our operator customers. In addition, we recognized that there will be times when one form of product is stronger than another in the marketplace. We all have seen it before, when the first paddle games came out. Certainly they took some places away from pinball machines. Later we saw those taper down, and pinball become stronger again. Then we had the driving-type video games which were more arcade-oriented, and those tapered down. And now we have a more sophisticated video game that is suitable for both arcade and street locations. So I think it's obvious there will be times when video will be stronger and times when pinball will be stronger. But I think both products will always be needed. One of the advantages we have is that we're a private company and don't have to produce games that aren't wanted in the marketplace. We don't have to increase our business for our public shareholders. This diversification was our original concept all along. It just so happened we started our diversification at a critical time. We would have been starting about this time in any event. But we have always intended to diversify into the various coin machine lines. As our needs arise, though, we can increase or reduce our production levels to be more responsive to what is needed in the field.

PLAY METER: Do you feel pinball is progressing as rapidly as video games?

STERN: I think from what we'll be seeing in the near future, you could say that they're progressing more rapidly than video games. Video games have progressed very rapidly, but I think a lot of things with pinball are happening right now that will be wonderful for the marketplace.

PLAY METER: Turning again to the video games, would you say that market is saturated right now?

STERN: I don't think it's saturated right now. But I do think only the very good video game will sell. It's no longer a marketplace where you can make simply a good game, but not a great game, and sell it. The operators are very choosy, and rightfully so. But, to answer your question, with the number of manufacturers who are getting into the field, the video game market is becoming very competitive. It is a very dangerous place for a manufacturer to be in. However, we think we have some great video games. Certainly Astro Invaders is doing very well for us, and apparently for the operators, too.

PLAY METER: What are your ideas as far as what makes for a good video game?

STERN: It has to appeal to the average player and to the above-average player. What we have seen as far as the great games that have certain levels where the game becomes more exciting, more difficult, and quicker. And, again, the game must have lots of action.

PLAY METER: Where are the games headed right now?

STERN: The games are becoming more sophisiticated, and there are several reasons for that - one of which is that the players are becoming more sophisticated. You see games with various skill levels in them, and I think one thing to note are the various types of monitors that are available right now. I think that one or two years from now there will be even more sophisticated monitors which will allow us to do even more in the games.

PLAY METER: Moving on to the matter of the phonograph market, what were your reasons for getting into that business? Isn't that pretty much a replacement market?

STERN: To date is has been a replacement market. However, there are many operators who would have been done a great disservice if the Seeburg phonograph were to disappear, because many operators still have many Seeburg jukeboxes out there and they need replacement parts. And they need new phonographs which will match their older installations. We do not see a growth market in the phonograph market; but, all the same, we do see a very good business there.

Most important to us, however, is that the Seeburg project will not be a success for us if we continue to make the type of jukebox that is being made today by all the manufacturers. We have some ideas for the future which we think will revolutionize the jukebox. I'm sure the other manufacturers have their ideas, too; but something must be done to revolutionize the jukebox business, to create a demand for the phonograph and make it a great earner again. One thing, if you look at all the current jukeboxes is that they are all microprocessor-based; however, they don't really do anything different from what the nonmicroprocessor-based jukeboxes did. We have some ideas for using the microprocessor which will make the phonograph earn more money. We have more experience with the microprocessor than any of the other jukebox manufacturers since we've been working with it for a number of years with pinball machines. I like to make the comparison with the early solid state pinball machines. They really did the same thing the electromechanical pinballs did. They didn't even have the memory features yet. As the manufacturers learned more about the microprocessor, they were able to make more and more interesting pinball machines. The same thing applies to phonographs. The current microprocessor jukebox does what its predecessor did. But we have more knowledge of how to use the microprocessor, and hope in the near future to take fuller advantage of that microprocessor and make the phonograph a solid earmng piece again. Take our newest pinball, Flight 2000, for instance, and put it next to a three-year-old Stern game called Pinball and you'll see the evolution. We plan to short-circuit that evolution, and do the same thing with the jukebox within a year or so.

PLAY METER: How is the Seeburg acquisition going to affect your distributor network?

STERN: We have now formed two divisions at Stern Electronics. We have a music division, over which Larry Siegel is president; and we have a games division, over which Steve Kaufman is president. And we also have a subsidiary, Universal Research Laboratories, which does our solid state engineering and board stuffing. It gives us better control over our boards. So, to answer your question on how the Seeburg acquisition will affect our distributor network, to a large extent, the Stern game distributors will remain Stern game distributors, and the Seeburg distributors which we will appoint - and which, in most cases, will be the former Seeburg distributors - will be Seeburg distributors. Where they overlapped previously, they will continue to overlap. And where they did not overlap previously, they will not overlap now. I should point out that although we have two divisions, we will not be so structured that everybody will not know what is going on in the various divisions. Our people will be able to help and participate in the various divisions.

PLAY METER: This past year you wrote an open letter to the industry wherein you explained that, regrettably, the price of equipment would continue to go up because of cost factors that were outside the control of the manufacturers. What are your feelings on this subject today?

STERN: This is still an inflationary economy, and it will remain an inflationary economy. It's not something that can be turned around overnight. It's something that we don't have full control over either because it comes from outside. We have seen what the cost of fuel has done to our economy. All these games contain petro-chemical products. And our suppliers' costs are continuing to go up; so our costs are going up too. And, because of this economy, the operator who has to pay a higher price for the games is going to have to make sure he's getting enough per play or a good enough split on his equipment to warrant the investment.

PLAY METER: Then what are your feelings about fifty-cent play for pinball?

STERN: I think it's something that's already warranted in many locations. The games are going to become more expensive. So, to have an adequate return, the operators will need fifty-cent play. It's appropriate in many locations already. You have to remember that inflation is here, that the player will be able to afford it, even though he may complain at first. We are not like a grocery store which can increase the price of its bread a penny a week. We have to do it in jumps. So I think it's very important where the games are on three-ball play at 25 cents that they are not adjusted merely to five-ball play at 50 cents. That's not going forward in my opinion because all you're really getting is one less ball for the 50 cents. And once people get used to five-ball, it's going to be very difficult to get them to three-ball again. So what we really need is three-ball, fifty-cent play.

PLAY METER: Moving on to another subject, what can be done as far as quality control at the manufacturer level?

STERN: This is certainly a constant battle for any manufacturer - to have good quality. It's something we are working on very strongly. In fact, we have instituted a new quality control program here, and have greatly increased our inspection and auditing. We are extremely concerned about this, especially as the games become more complicated. We think we're doing some things on our future games which will be of far greater quality. But I also think there are some engineering changes that can be done to make the games a little easier to build and easier to service. There is a lot of talk about the quality of the American worker, and I certainly believe we need to have a good quality worker. But I think the worker today is an even better worker than in the past because of the state of the economy.

PLAY METER: As a speaker in New Orleans at the Amusement Operators Expo, you sounded a note of caution about the removal of the IRS stamp. You said that the removal would present more of a problem to operators than what the industry was seeing at the time. Can you explain yourself on that Point?

STERN: I was referring to the removal of the $250 IRS tax on gaming equipment. This pertained not only to pure amusement games but also to games that are in the "gray" area. The problem we face, as I see it, is with these gray-area games. They may be pinball-type games or video games. Today, though, I think we're seeing more gray area games in the video area, games which appear to be amusement games but which are really made for gambling. They'll include up to 999 free plays and often have a knockoff button. The problem which we face is that without the IRS's enforcing a tax stamp to put on such gambling machines, it is difficult for local authorities to tell which are the gambling machines. With the tax stamp, local authorities could tell if the game was a gambling device. Without it, the local authorities have to watch the game, play the game - and the local authorities are not educated about games. When too many of these games appear, the local authorities may decide that the easiest way to prohibit such gambling machines is to prohibit all amusement machines. This is basically what happened in the '40s with pinball machines when many one-ball or in-line games were operated; all pinball machines were outlawed. The same thing could happen again today. Some of the great legal arguments which were made on behalf of the flipper games were based on the pure amusement value of the games and the deprivation of due process and equal protection under the law, as provided for in the Bill of Rights. The argument was made in California, for example, that it was unfair to prohibit a pure amusement machine when pure amusements such as movies were not being prohibited. If there is no easy distinction between pure amusement and these gray area machines, we lose that argument. Authorities will, in many cases, take the easy way out, and that is to outlaw everything. Without any federal law protection, everything goes to the various state and local authorities, and I see a disaster in many of these areas. I have nothing against pure gambling, but it is the gray area equipment which can cause problems for this industry.

PLAY METER: What can and should be done to combat this problem?

STERN: I think lobbying at both the local and national level is appropriate. I think operator organizations could be most effective because they represent the most people. I think self-policing is the best answer. Operators and distributors cannot bury their heads in the sand here. They must become aware of the dangers with these gray area games.

PLAY METER: How as a small pinball manufacturer did Stern Electronics survive in this business? When Stern entered the market a few years back, there were three major pinball manufacturers, and it was largely considered there was only room for three mayors.

STERN: That's a good question. I think the answer is that we were able to adapt very quickly where we had to adapt. We are not a public company. We do not have to worry about many shareholders since we are a private company. And we are an informal company, just as I indicated before with our Seeburg and games divisions. We are not completely structured; so we are able to move quickly and adapt. The only problem one has in this kind of situation is money! We've had to do some pretty fancy financing because we're not a public company and don't have a parent, like a large movie company, to finance us. We have to do it all ourselves. So that's the most difficult part.

PLAY METER: Now that there are four major pinball manufacturers—

STERN [interrupting]: Thank you.

PLAY METER: —is there a possibility for a fifth?

STERN: Anything is possible. We welcome strong competition. It makes us make better games.