How Casinos Use Math To Make Money When You Play The Slots | Forbes

My second piece for is a look at what the math of slot machines means for the casino and the player:

Slot machines remain the most important money-making part of casinos in the United States. In many states, casinos make between 65 and 80 percent of their gambling income from slots. In Las Vegas, the percentage varies from 88 percent in casinos that cater primarily to locals to 50 percent on the Las Vegas Strip, where high rollers betting tens of thousands a dollar a hand skews the results in favor of table games. Every day, players put millions of dollars into slot machines. Why?

Read it all: How Casinos Use Math To Make Money When You Play The Slots

So far the reaction to my new writing home has been very positive. Thanks to everyone who made the jump to Forbes with me, and to all my new readers. And a big thanks to Bob Ambrose, who answered my questions very well.

CEO Shuffle at Scientific Games – Vegas Seven

In this week’s Green Felt Journal, I take a look at the CEO transition at Scientific Games:

In a move with big repercussions for the gaming industry, manufacturing giant Scientific Games recently announced that its chief executive officer, Gavin Issacs, is being replaced by former Norwegian Cruise Line CEO Kevin Sheehan. This is a major transition for Sci Games and reveals the direction the industry is headed. 

Read more: CEO Shuffle at Scientific Games – Vegas Seven

The manufacturing side has seen a lot of consolidation but remains just as compelling as the operating side.

Old-School Is New Again at the Global Gaming Expo – Vegas Seven

In this week’s Green Felt Journal, I consider what I found on the G2E expo floor:

It was clear that the big question asked last year at the expo—how to appeal to a new generation of gamblers—has not been fully answered, but we got several tantalizing glimpses of the future.

Old-School Is New Again at the Global Gaming Expo – Vegas Seven

I think there is a desire and need for new kinds of games. Of course slot machines still make billions each year, but past changes in gambling have shown that all that can change. People didn’t stop playing faro or start playing slots overnight. Is “social” or “skill” going to replace slots next year? No. In twenty years? It’s possibly that something will.

Slots in MD offer more competition

Maryland’s first slots parlor has just opened. From the Philly Inquirer:

Tim Wilmott, chief operating officer and president of Wyomissing, Pa.-based Penn National Gaming Inc., joined Maryland Gov. Martin O'Malley in a ribbon-cutting for the $97.5 million casino, whose doors first opened to the public Monday after trial test days last weekend.O'Malley praised Penn National for building the slots parlor, which created 350 casino jobs, in less than two years. Maryland voters approved gambling in a November 2008 referendum."We are here to move the state forward and to keep [gambling] revenues from leaving our borders for Delaware and West Virginia," the governor said.The 75,000-square-foot casino is just off the interstate's Exit 93, about 25 miles south of Delaware Park in Wilmington, 50 miles from Harrah's Chester Casino and Racetrack in Delaware County, 65 miles from SugarHouse on the Philadelphia waterfront, and 80 miles from Parx in Bensalem.

via Maryland ups the I-95 ante with its first slots parlor | Philadelphia Inquirer | 09/30/2010.

So the MidAtlantic region’s shaping up to be a real casino hotbed, with slot parlors mere dozens of miles from each other.

Penny slots most profitable in 09

I’ve been trying to answer the question, “Why are slot hold percentages generally increasing” and have come to the conclusion that player preference for high-hold, low-denom games is a major factor. Finishing up a paper on the question, I thought I’d share some raw data:
Between 2000 and 2003, the Gaming Control Board didn’t list pennies as a separate denom because there weren’t enough of them. Ditto for multi-denoms in 2001/02.

In this chart, I compared win per unit for all statewide slots by denom. This is a better index for player preference than straight revenues, because it gives an idea of how popular each individual machine is. If you’re a slot manager, you generally want more machines that have a higher win per unit on your floor. Naturally, you’re not going to put in all penny slots (even though they are the most profitable) because some players prefer other denoms. But the slot floor denom mix is highly variable: in 2000, nearly half of all Nevada casino slots were quarters; today, just over one tenth are. So these numbers are important.

The shorthand version is that pennies have fallen to about 2005 numbers, while nickels are back to 2003, quarters to 2004, and dollars to 2000. Multi-denom slots are back to 2003 levels, give or take.

So it seems that, despite the fact that the pennies have an average hold of over 10% while dollars are near 5%, pennies are more popular than dollar machines (and all other machines). Slot gamblers are essentially paying twice as much to play pennies than they would dollars, and their popularity doesn’t seem to be slowing down. In both real and proportional terms, pennies have lost less ground than all other denominations.

Of course, it’s possible that players turned off by high holds have stopped playing Nevada slot machines altogether, since all slot numbers are down. Dollar slots, though, lost far more ground than pennies. In 2009, penny slots dethroned dollars for the “highest win per unit” crown. It’s a historic change, since dollars had long ruled the roost.

It seems clear that, while they search for bargain room rates and trim their gambling budgets, most players aren’t looking for any advantage when it comes to actual slot play.

USA Today on penny slots

There’s a big piece in today’s USA Today about penny slots:

The penny slot machine, once a joke among serious gamblers, is the hottest form of betting during this recession.

Even casinos that cater to wealthy gamblers are replacing $1 machines with video slots that accept bets one cent at a time. “You can play longer with less money on penny slots,” says Ed Feigenbaum, editor of Indiana Gaming Insight, a newsletter.

The penny machines accounted for 36% of bets at Indiana casinos in July, up from 8% in 2005.

USA TODAY examined gambling data in seven states and found penny slot revenue soaring everywhere. National numbers are not available.

Las Vegas was slow to pick up on the trend to penny slots, but it has jumped on board, too. In the past two years, Nevada casinos have added more than 7,000 penny slot machines and removed 12,000 machines that require bigger bets.

via Casinos earn coin from penny slots –

As far as playing longer with less money goes, I don’t think so. I’ve already broken this down, but apparently it hasn’t bubbled up into the public consciousness yet. Here goes:
In 2008, the average Nevada penny slot machine had a hold percentage of 10.22%

The top bet on penny machines usually runs between 100 and 500 credits, though it can go even higher.
For the sake of argument, let’s take a conservative 200 credits as the max bet. This is what most players will play, since it gives them the greatest chance of unlocking the bonus rounds.
200 credits means $2.00 bet per spin. The average slot players spins the reels ten times in a minute. That means $20 a minute is being played through.
At 10.22% hold percentage, this means that after a minute of play the casino will hold (on average) $2.04.
That’s $122.64 over an hour of continuous play. One hundred dollars–my arbitrary benchmark buy-in–will last about 48 minutes and 50 seconds.
In 2008, the average Nevada quarter machine had a hold percentage of 6.11%
The top bet on most quarter games is 3 credits, or 75 cents per spin. The average slot players spins the reels ten times in a minute. That means $7.50 a minute is being played through.
At 6.11% hold percentage, this means that after a minute of play the casino will hold (on average) 46 cents.
That’s $27.60over an hour of continuous play. One hundred dollars–my arbitrary benchmark buy-in–will last about 3 hours, 47 minutes and 20 seconds

Clearly, it “costs” substantially more to play penny slots with max credits than it does to play quarters. And this was with a conservative 200 max bet plugged in. If you’re playing a 500 credit machine, you’ll be “paying” on average $306.60 for an hour’s play. Yes, if you’re dribbling in the credits and playing very slowly you could milk a penny machine for a few hours. But if you’re playing with any intent to get a jackpot that actually matters, you would be better off (from a bankroll perspective) playing a quarter or even dollar machine. From an entertainment perspective, you may do better with the pennies.

By not disclosing that penny slots typically have far worse hold percentages than higher denominations, this article suggests that the player is better off playing them. As I said, this may be true from an entertainment perspective, but it certainly isn’t if you’re using time on device as your yardstick for value. I would think that this was an important part of the equation.

And as far as penny slots being the new thing in Las Vegas, they aren’t. Here’s the breakdown of Nevada’s statewide slot mix for 2008:

Denom # of machines percentage of market
1 cent 35,842 20.87%
5 cent 10,973 6.39%
25 cent 21,633 12.59%
1 dollar 14,411 8.39%
M-Deno 83,245 48.48%
Other 5,589 3.25%

As you can see, multi-denomination machines are what’s big now. They’ve gone from about 11% market share in 2002 to nearly 50% in 2008. Penny slots have increased impressively, but according to the numbers there are more than twice as many multi-denoms out there. Granted, these machines can act as penny slots, but they are clearly the dominant presence.

My final critique involves the idea that penny slot revenue has increased despite the recession. Here’s the pith of that point from the USA Today article:

Revenue from every form of gambling has fallen in Nevada during the recession — except penny slots. Penny slot revenue was up 3% in the year ending June 30. The 32 other types of gambling tracked by Nevada regulators — from sports betting to roulette — plummeted 19%.

It is true that penny slot revenues have increased, but that’s because the installed base has increased. For example, in June 2009, for all Nevada casinos:
39,089 penny slots, winning $155,209,000 for the month, an increase of 0.51% over the previous June. However, from June to June Nevada added 3,797 penny slots, an increase of 10.53%.

When you add 10 percent more product but do a half-percent more sales, you are becoming less profitable per unit. Indeed, revenue per unit for the month of June 2008 was $4,365. In June 2009, it was $3,970. So revenue per penny slot actually fell by 9%.

That’s not as bad as some other games (craps, which had the same number of games, saw its revenue decline by 15 percent). But it’s hardly the out-of-the-park home run that is suggested by the rather narrow reading of the Nevada revenue numbers by the author. At best, you could say that the penny slots out-performed the gaming revenues at large, which lost 13.86%, though that number is tempered by fewer games and slots. All in all, “same position sales” indicate that penny slots did slightly better than all other forms of gambling in Nevada.

Lower your slot hold, get more players?

A story in the Las Vegas Sun on Friday gives me a jumping-off point for a somewhat-extended discussion of slot hold:

Longtime gamblers have been saying it for months: If you want people to play in your casino during the recession, reduce the hold on your slot machines.

A panel of marketing experts validated that strategy at last week’s Casino Marketing Conference and Player Development Summit, sponsored by Raving Consulting Co. at Paris Las Vegas.

About 200 casino marketing executives, mostly from tribal casinos and commercial properties outside Nevada, attended the event. Organizers called it “the recession edition” of the annual show, and many of the panels and presentations dealt with how to draw crowds in tough economic times.

In a session on what a casino’s best players are saying and doing during the recession, panelists concurred that many of them are staying home. But panelists said one strategy to get people in the door is to drop their traditional hold percentages to keep gamblers playing.

“Casinos have become far more interested in getting the money as quickly as possible to satisfy Wall Street,” said panelist Michael Meczka, president of Los Angeles-based MM/R/C Inc., and a 30-year member of the American Marketing Association and the Marketing Research Association. “Casinos no longer care about providing a great time, every time.”

via Marketers: Reduce slot hold to attract more customers – Las Vegas Sun.

It’s an easy point to make, and one that’s hard to argue against. All the same, let’s take a closer look at the actual numbers here.

I’m in the middle of a study on slot hold percentages and slot mix, 1992-2008, and it’s quite an education. I’m comparing statewide, Strip, and Boulder Strip stats to get a sense of how the numbers for high-margin tourist-oriented casinos and lower-margin locals-oriented ones have changed, and there are some definite patterns. For now, I’ll stick to the statewide averages.

Back in 1996 the state of Nevada recorded its lower average slot hold from 1992 to the present: 4.91%. The average “cost” of $100 in play was a little less than five dollars. That’s an average for all denominations, so while it has value as a comparative tool, it doesn’t do the real situation justice. So let’s try to put ourselves in the shoes of the average Nevada slot player, circa 1996.

Considering quarter machines were the most common slot then, consider this: the average person playing three quarters on a Double Diamonds machine (this was one of the most popular games abck then, IIRC), would be betting 75 cents a spin. They’re probably averaging ten spins a minute, which means that, each minute they play, they are betting $7.50. An hour of plays means $450 cycled through the machine. In that year, the average quarter machine had a hold of 5.18%. An hour of slot play, then, would cost the player $23.31.

A hundred dollars could give them about 3.5 to 4 hours of time on device, on average. Factoring in a less-than-robotic ten spins/minute pace and time out for bathroom breaks or waiting for slot attendants to fill empty hoppers or handpay a big jackpot, you get an even longer time on device.

Fast forward to 2008. The average hold for all Nevada casino slots is 6.16%. Big deal, you might think. That’s only a 1.25% increase. That’s the total arithmetic increase, true, but proportionally, it’s a 25% increase. With the growing prevalence of lower-denom, higher-hold, higher-bet games, the change is quite apparent. There are more penny machines (35,842) than any other denom, besides multi-denom games, which can be anything from a penny to dollar, or more, so we’ll use pennies for our new typical slot experience.

There’s no standard on a max bet for a penny machine, since they can have dozens of paylines with dozens of credits bet on each. For the purposes of a quick demonstration, we’ll take a machine with an average max bet of 200 credits.

Each spin, then, costs $2.00. That’s $20.00 a minute cycling through the machine, and $1,200 an hour. The average statewide hold for pennies was 10.22% in 2008, so the average “cost” per hour of penny slot play is $122.64.

The same hundred dollars that could buy a player, on average, about four hours of entertainment in 1996 would get them barely 45 minutes of time on device in 2008. Factoring in less down time because of ticket-in ticket out technologies (no hopper fills), and quicker play because of push-buttons probably would give the player even less time with that $100 bill.

That’s a major change, to say the least. Of course, the players are choosing to play machines with higher hold. This seems counter-intuitive, but there’s no other explanation. In 2003, there were so few penny machines in the state that the Nevada Gaming Revenue Report just lumped them into the “other” category. Five years later, one in five slots in Nevada casinos was a penny slot. Casinos wouldn’t replace 20% of their slot inventory with pennies unless people were playing them.

Why are they so popular, if they pay back worse than old-fashioned quarter machines? Probably because they are more fun–a game like WMS’s Star Trek line that offers numerous bonus rounds, video clips, and “sensory immersion” just blows Double Diamonds out of the water, particularly for novice or occasional gamblers.

The solution won’t be to throw out all the multi-line video reels and go back to mechanical steppers, but to offer games that combine the excitement of the new slots with superior time on device.

I’m not trying to tell anyone how to spend their gambling dollars or run their business. I’m just saying that, looking at the numbers and drawing a few very reasonable inferences, it is clear that players, on average, get much less time for their slot dollar today.

Rent-a-Car slots

If you don’t get your slot jones on in the airport and can’t wait to get to a casino, you will soon be in luck: the county commission has approved a proposal for slots at the unified car rental center, even though the bid seems a bit high. From the LVRJ:

Anxious to get revenue wherever they can find it, Clark County commissioners approved a construction proposal that will make way for slot machines at an airport rental car facility despite a recommendation to reject all the bids.

Commissioners voted unanimously on Tuesday to approve a $375,553 bid to complete office space at the Rent-a-Car Center at McCarran International Airport even though the bid was 41.6 percent higher than an engineers estimate of what the job should cost.

The office space is important in terms of generating revenue because it will house an area to supervise slot machines, a requirement under Nevada gambling regulations.

Slot machines are a major revenue-generating concession at the airport, earning about $38.5 million from more than 1,300 slot machines in the last fiscal year. Operating revenue for the entire year at McCarran and four smaller county airports was $376 million.

Officials hope to install 40 slots at the Rent-a-Car Center, although they dont have an estimate of how much money they will generate. With the vote Tuesday, the project could be complete by fall.

County approves Rent-a-Car Center slot machine bid despite cost – Business –

I crunched the numbers and got a win/slot/day of about $81 for the airport slots–way lower than the Clark County average, but not too bad for an operation with minimal overhead.

A commissioner spoke of the need to get the slots clanging as soon as possible. According to my calculations, if we assume the same win/slot/day metric for car rental slots as airport slots (which is being a bit generous, I think), with 40 slots online, each day that the car rental slots aren’t up, the county loses $3240 in revenue. If taking a re-bid would push the slot opening back by a month, this is about $100,000 in revenue that will be “lost.”

But wait–according to their engineer’s estimate, the job really should cost 41.6% less than the high bid, or, according to my arithmetic, $219,355.95, which is $156,197.05 in real cash money that the county is overpaying.

If putting it out to bid meant a month’s delay but produced a bid in line with the engineer’s recommendation, the county would save about $56,000, which I think they could definitely use. That’s salary + benefits for a full-time employee who could be out there working (or not).

And that’s assuming that car rental slots are as profitable as airport slots. I don’t think they will be, because people at the airport are a captive audience–they have an hour or two to wait for their plane to take off, and nothing they do will make it take off faster. They don’t have anything to do but sit around and wait. People waiting for rental cars, though, have to stand in line. I don’t know many people who’ve been on a plane for hours and are loaded down with luggage who’d rather play 8/5 Double Double Bonus Poker than get their car and get to their hotel.

If the actual win/machine/day is substantially below that of airport slots, that makes this an even bigger waste.

It’s funny that a guy with no vested interest in the project and about five minutes to spare was able to come up with some estimates of how much money the slots could make, based on nothing more than information included in the article and basic arithmetic, but the public officials who are charged with safeguarding the public interest–and taxpayer dollars–“don’t have an estimate” of how much the slots would generate so they accepted a bid that was far higher than their own experts suggested was tenable.

Global slot scheme

I think this story from KLAS really demonstrates what a global business gambling has become:

Federal prosecutors have charged two men with conspiring to sell counterfeit video slot machines bearing the name of the Reno-based International Game Technology.

The two men include a 43-year-old Cuban national accused of selling the slots in Latvia.

Rodolfo Rodriguez Cabrera and 35-year-old Henry Mantilla of Cape Coral, Fla., also are accused of selling counterfeit IGT computer programs in the seven-count indictment that was returned by a federal grand jury in Las Vegas in April and unsealed on Wednesday. Justice Department officials say Cabrera was arrested Monday in Riga, Latvia.

Mantilla is scheduled to appear on a summons in federal court in Las Vegas on July 2.

If convicted, each faces up to 45 years in prison and more than $5 million in fines.

Feds: 2 Conspired to Sell Counterfeit IGT Slots – Las Vegas Now |.

Here’s the lesson we can learn from this: don’t try to sell rip-off IGT slots. That prison time makes slot cheating look like jaywalking.

Things are getting worse…

…but I see a silver lining. In fact, you could argue that things are getting a whole lot better. It’s just a matter of perspective. Specifically, we’re talking about July’s Nevada gaming revenues being down. From the LV Sun:

For the seventh straight month, casino winnings on the Strip slumped, falling 14.6 percent in July from the year before.

It is “the worst run for Nevada gaming casinos since the early 1980s,” said Frank Streshley, senior research specialist for the state Gaming Control Board.

It was also the seventh month of decline for casinos statewide and the third straight month they reported gross win of below $1 billion.

Casino winnings fall for seventh straight month – Las Vegas Sun

I prefer to see the positive side: why not say that gamblers lost less money in Nevada this year? That’s good, isn’t it?

I thought the breakdown was interesting but ultimately inconclusive. Mesquite got hammered, which says to me that people from Utah and Northern Arizona don’t want to waste their gas on gambling trips. But you’ve also got some major erosion at baccarat on the Strip, while penny slots there actually gained. And so did $100 slots, a whimsical idea if ever there was one.

There isn’t a nice glib soundbite to wrap around these numbers, and I think they show that gambling habits are much more complex that most people think.