In my 40-plus years in gaming, I have seen the industry grow from backroom vice to main street entertainment. For the first 50 years after gaming was legalized in Nevada, table games were king, and the only legal gaming in the U.S. could be found in sparsely populated Nevada. Back then, Nevada’s isolation made gaming something special, but today, legalized gaming can be found in all but two states. The trend today is to offer more and more slots at the expense of table games, and I am fearful that table games will eventually die. Not by their own hand, but by inept management and marketing.
Management’s objective is to maximize profits, and every gaming device must fight desperately to stay on the floor. The device that provides the most cash flow per square foot will, and should, win out. But today’s management is only hastening table game’s demise, as the table game cannot compete with the slot machine on these grounds. Management is facilitating the end of table games by making two huge mistakes that border on malpractice. The first is what I call managing by line item, and the second is ignoring the fact the game must have a positive expectation when styling deals to attract the premium player. Oddly enough, this will make perfect sense to those who have little or no experience in gaming. It is those who have dedicated their careers to gaming who will have the most difficulty grasping these simple concepts.
Managing by line item assumes that any reduction in expenses leads to an increase in profit. Slot technology, like bill validators and kiosks, has significantly reduced expenses without affecting revenue. Unfortunately, technology of this sort is not available to table games. So, when management tries to increase profits by decreasing expenses, what line item is targeted? Payroll! Management foolishly assumes that any reduction in payroll results in greater profits. Wrong! In table games, payroll drives profit. If management decreases payroll by opening fewer games, the end result is an increase in utilization, i.e., more players per table but fewer tables. Increasing utilization decreases the hands, throws or spins per hour, thereby effectively reducing the win per player. For example, a solo blackjack player at a table game will play about 220 hands per hour, whereas the same player at a full table will only play about 60 hands per hour. This player is not going to stay 3.6 times as long just to lose the same amount. All table games experience the same correlation: Increased utilization results in fewer bets per player per hour.
Granted, there are expenses that can, and should, be cut in the pursuit of profit, but these are only those where a dollar’s worth of expenses generates something less than a dollar’s worth of revenue. Cutting casino expenses without decreasing revenue is a science, not an art, and few managers know where to cut and where to optimize. Usually, management is given directives like “cut expenses by 20 percent.” Directives like this will not maximize table game profit. The casino will just be winning less from the same number of players. In fact, profit usually decreases even further, and management foolishly believes they did not cut enough. Oddly enough, management is maximizing return on payroll but decreasing profit in the process.
The second mistake is the idea that management can pay anything for premium play. Up until the mid-1980s, the only tools available to marketers were complimentary rooms, food, beverages, airfare and an occasional special event. It was impossible to return any significant portion of a true high roller’s theoretical loss. Back in the day, the good about the premium player was that the play yielded a high profit margin. The bad about the premium play was the extreme volatility—huge player losses and huge player wins. Well, we have finally, though unfortunately, invented something that keeps the bad (volatility) while minimizing or even eliminating the good (high profit). That invention is the discount on loss. Players have now become the casino, and the casino is now the player.
In the 1980s, the Sahara Casino in Las Vegas started offering no-commission baccarat. That is, when one bet the bank and won, he was paid 1-to-1 versus the customary .95-to-1. I phoned the casino manager at the time and asked if he was aware of what he was doing. At the time, I was teaching at the University of Nevada, Las Vegas, and, naturally, he thought I was an academic and, therefore, what did I know? He said the problem with gaming was guys like me who did not know anything about gaming. I told him that he certainly would not be offering this game a month later and, if the idea was his, he would likely be gone as well.
The game opened at 6 p.m. each evening, and there was always a line to play the game. And why not? A card counter would love to find a game with a slight advantage, and this rule modification gave the banker bettor a 1.24 percent advantage. The game actually happened to show a profit the first month of operation, thereby convincing the executive that math only got into the way. But a short time thereafter, the rule change was gone and so was the executive. Who would have thought?
Now we have the discount on loss, and its true effect on the game is so elusive that very few executives actually know how it works. It is deceiving. A casino will offer, for example, a 10 percent discount on loss, which sounds like it will only cost management 10 percent. Wrong. A discount on loss effectively reduces the game’s mathematical advantage, which is driven by the game played, length of play, the volatility of betting and the terms of the discount, and it can actually result in the player having an advantage. A 10 percent discount, as small as it may seem, could actually result in the player having a significant advantage.
Recently I was contacted by a casino that was offering a dice player a 12 percent discount on losses over $100,000 and 17 percent on losses over $200,000. This dice player bet $5,000 on the pass line with 3-4-5x odds and took the maximum of up to five come bets of $5,000 with 3-4-5x odds. In addition, the player was given promotional chips to encourage the visit. I was told that the player seldom played as long as an hour. Well, if you do the math, you discover that this player’s positive expectation is more than $8,000 per hour. Never mind the expense of the promotional chips.
In trying to explain to the executive how the discount worked and how detrimental it was to management, he asked “But what do I tell the player who is getting the same deal elsewhere?” I told him that he should adopt a strict company policy: Never offer a game where the advantage to the casino is less than zero. Never. I don’t know why casinos would ever go this far to offer a premium player a dead-even game, but if they adopted this simple policy, they would be doing themselves a great service. (By the way, this player’s average bet is about $57,000, so the casino suffers through extreme wins and losses without any of the benefit of a high profit margin.)
As a slot machine can experience losses, so can a player who is playing with an advantage. But the casino executive will misinterpret these losses as the deal actually being profitable. Wrong again. The only thing the casino sells is what should be a game’s disadvantage. The word “math” could replace “casino.” Nevertheless, today’s marketers refuse to acknowledge, or choose to ignore, this foundation of gaming. That is, the casino must have a mathematical advantage.
But why would a casino offer a deal that is unprofitable in the first place? Well, it’s because their competitors do. Apparently offering a deal equal to one’s competitors gives management some level of comfort. Surely, they did the math. Didn’t they? If not, probably the competitor they mimicked did the math.
In September 2011, The Press of Atlantic City penned an article titled “Blackjack player who took Atlantic City casinos for $15 million says rules put the math on his side.” 1 The tipoff to executives should have been the fact that more and more professional poker players are now negotiating discounts and playing table games. Yet today, astute players are preying on the less astute casino executive and are winning. Casino marketers feel like they must compete regardless of the parameters of the deal. Ignore this feeling. If faced with a deal where the casino has a disadvantage or not, choose not.
With the exception of a few Indian casino monopolies, gone are the days when demand exceeded supply. The management skills we practice today were learned and passed down from a time when it was difficult for a casino to fail. Casinos manage as they always have. But that management style cannot succeed in a time where supply exceeds demand.
With managing by line item and minimizing, if not eliminating, the profitability of premium player, the table game department is experiencing smaller and smaller profit contributions. Eventually, table games will be nothing more than a novelty—dead by the hand of poor management. Save yours while you still can.
1 http://tinyurl.com/6fwzg7j and http://tinyurl.com/64teqq8.