Abstract
Perhaps nowhere is the preceding sentiment more appropriately expressed than in gaming and wagering, in which kings and queens play amid snake eyes and wild jokers, and horses run for the roses. It has indeed been said that, “Whoever wants to know the heart and mind of the earth’s citizens needs to understand gambling.” This chapter explores the essential economic features of this fascinating business, for whose services consumers will spend more in the aggregate than for any other form of entertainment.
It’s better to be born lucky than rich
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Notes
- 1.
The quotation is from James McManus in the foreword to Schwartz (2006, p. xi).
- 2.
- 3.
See Bagli (2012).
- 4.
The Flamingo Hotel was designed by Siegel to attract the rich and famous to the middle of the desert. The hotel started a building boom that was not to slow until the early 1980s, when more than 50,000 hotel rooms were available to host some of the largest business conventions in the world. Also see Puzo (1976). Burbank (2000) also provides a review of Nevada gaming history.
- 5.
Taxes are currently at a rate of 6.75 % (raised from 6.25 % in 2003) of gross winnings in Nevada and 9 % in New Jersey, where a surcharge of 1.25 % of gross revenues to be invested in urban development over 25 years also exists. In Detroit, the 19 % tax on gross income is divided 55 % to Detroit and 45 % to Michigan. Taxes in Missouri, Iowa, and Louisiana are in the range of 20–22 %, but Illinois is a bit higher. As noted in Sanders (2005), once gaming is established, states tend to raise tax rates. See also American Gaming Association.
- 6.
However, the average length of stay of Atlantic City visitors was probably a little less than a day. In Las Vegas, the average length of stay was about 3.8 days.
- 7.
Regulations vary widely by jurisdiction and change over time. See Cabot (1995), Braunlich et al. (1999), and the Website www.CasinoLaw.com. Drape (2013) discusses the interest of many states to legalize sports betting, which is opposed by the major sports governing bodies.
- 8.
- 9.
For example, Alvarez (2004) discusses Blackpool. Also, new infrastructure improvements connecting Hong Kong to Macau along with the arrival of modern American casinos have already made Macau the major gaming destination of Asia. By 2006, Macau, with 22 million visitors, had revenues of $6.95 billion, which surpassed the Las Vegas Strip’s revenue largely because the average table there earns three times as much as a comparable table in Las Vegas. The growing power of local middlemen who steer big players to casinos has, however, diminished profitability, as is discussed in Audi and Stanley (2008). As indicated in Kolesnikov-Jessop (2010), junkets in Macau account for about 70 % of the business, and independent junket operators who bring in high-rolling clients earn a commission of between 0.6 and 1.8 % of the value of what the clients play. The organizers extend large, short-term loans to players, and casinos pay the organizers a share of the take. See Sanders and Stanley (2006), Barboza (2007), Tan (2007), Norton (2010), Wong (2012), O’Keefe (2012, 2013, 2014a, b, c), Wassener (2014), and Back (2015).
- 10.
As Harden and Swardson (1996) note, Indian gaming began in 1975, when the Oneidas of New York began to use bingo as a fund-raising mechanism to pay for a fire department. The Oneidas argued that because they are an Indian nation, their sovereignty entitles them to run their own game. The Seminoles of Florida quickly began their own high-stakes bingo game and were challenged in Seminole Tribe v. Butterworth, a landmark 1981 case. Detailed reviews of the Connecticut Pequot tribe’s entry into gaming are provided by Benedict (2000) and Eisler (2001).
The IGRA of 1988 had its roots in two U.S. Supreme Court decisions. In McClanahan v. Arizona Tax Commission (1973) , the Court pronounced that Indian tribes “have a right to make their own laws and be governed by them,” which essentially recognized certain tribes as sovereign nations. And in Bryan v. Itasca County, Minnesota (1976) , the Court said that states lack civil regulatory jurisdiction over Indian tribes and members on their reservations or trust lands.
In a later decision, California v. Cabazon Band of Mission Indians (1987) , the Court decided that, if a state didn’t have a public policy against gaming activities and allowed various forms of gambling, the state could neither prohibit nor regulate gaming activities on tribal lands. Congress, recognizing the sovereignty of Indian tribes, then passed the IGRA. This act established an independent federal regulatory body (the National Indian Gaming Commission) and federal standards governing the operation of gaming on reservations. See also Grinols (2004, pp. 36–45) and Akee et al. (2015) for a study of IGRA’s effects on economic development.
Three categories of gaming activities have been defined:
Class I: Traditional social gaming activities for prizes of minimal value, the regulation of which is the responsibility of the tribal government.
Class II: Primarily bingo, but also lotto, pull-tabs, and card games. The National Indian Gaming Commission (NIGC) regulates such games.
Class III: All other games not otherwise classified—which means casino-type gaming. Such games must be approved by tribal ordinance and be conducted in conformity with a tribal-state compact entered into by the tribes and the states. The compact must be approved by the NIGC.
As of 2010, 200 Native American tribes had established 350 casinos in 30 states and were generating more than $25 billion a year. Goodman (1995, pp. 111–113) describes the background for the Cabazon decision in more detail. Barlett and Steele (2002) discuss serious loopholes and defects that have led to widespread misallocations of resources, and corruption and other similar problems are discussed in Emshwiller and Binkley (2004). Spector and Berzon (2010) write of potential debt default problems at the Pequot casino in Connecticut. Berzon and Spector (2010) note that in debt restructurings for casinos normal rules do not apply because laws on Indian sovereignty mean that creditors are unable to seize assets or take equity stakes after defaults. See also Butterfield (2005a), Sanders and Emshwiller (2005), Light and Rand (2005), Bordewich (2006), Spector (2011), Sokolove (2012), and Glazer (2013). Williams (2012) discusses concerns about Indian casino growth potential and Millman (2012) on competition between tribes. On same subject, see Lovett (2014).
- 11.
In North Dakota , where low-stakes charity games are legal, the state receives 5 %, the charity 65 %, and the location owner 30 % of the casino’s gross win. Similar charity-designated games are also conducted in Canadian provinces. In Alberta charities split 10 % of their gaming profits with the provincial government, and the operator is entitled to 40 %.
- 12.
As of 2012 restrictions on offering games such as online poker were relaxed. As the U.S. Congress (1999) National Gambling Impact Study suggests, the Interstate Wire Act, whose history is discussed in Schwartz (2005), is fraught with ambiguity. For example, does the phrase “wire communications” include the Internet? What types of wagering and gambling are allowed? And where does jurisdictional authority reside? Some argue that because the Internet didn’t exist at the time of the statute’s formulation, the intent of the law applies only to telephone communications. Complications also arise from interpretations of the U.S. Penal Code . Sec. 47.05 says that “(a) A person commits an offense if, with the intent to further gambling, he knowingly communicates information as to bets, betting odds, or changes in betting odds or he knowingly provides, installs, or maintains equipment for the transmission or receipt of such information.” Sec. 47.06 similarly applies to possession of gambling devices, equipment, or paraphernalia. See Cooper (2012) and Bogdanich et al. (2015) on Internet fantasy sports betting.
As noted by the National Gambling Impact Study Commission Report (1999), the countries with laws in place to extend Internet gambling licenses include Australia, Antigua, Austria, Belgium, Costa Rica, Curaçao, Dominican Republic, Finland, Germany, Honduras, the United Kingdom, and Venezuela. As of 2013, online gambling had begun spreading to state-legalized and controlled entities from which states could pool poker networks and large casino companies could host online betting. It is estimated that as of 2014, there were at least 2000 Internet gambling sites worldwide. Also see Cukier (2000), Pfanner (2009), Meier (2010), Verdi (2010), Morrissey (2011), Schechner and Berzon (2011) regarding poker, Berzon (2013a, b), Zernike (2013), and igamingnews.com.
- 13.
Betting service companies such as Betbug allow anyone downloading the software to propose a wager and then scan the Web to find a bettor to take the other side. Betbug takes a 5 % fee from the winning amount. Betfair take bets from more than 80 countries, with 80 % from Britain. Betfair lists hundreds of sporting events and, depending on the size of the bet, takes 2–5 % from the winner’s take.
- 14.
- 15.
In Canada , for example, casino gaming has been legal since 1969, when the Canadian federal government’s criminal code allowed provinces or charities to establish casinos using the games of roulette or blackjack. Video lottery terminals and slot machines have also been approved. Casino licenses are held either by provincial governments or by nonprofit organizations. See also Gaming & Wagering Business, April 1993. One of Canada’s largest casinos opened in Windsor, Ontario, in May 1994.
- 16.
Osnos (2012) describes the opportunities and problems of Macau’s casino industry. See also Bertoni (2012), Siu (2013), and Yu and Chan (2014). Gough (2015) describes growth problems noting that Macau generates 95 % of gaming revenues from table games as compared to 50 % in Las Vegas, where slots are more important. China’s Five-Year Plan in 2011 also set a goal to make Macau a “world tourism and leisure center.” To this end, new gaming table growth has been capped at 5 % annually since 2012. It is estimated that by 2018 there will be around 100 Asian gambling establishments as compared with about 1000 in the US.
- 17.
- 18.
There is evidence to suggest that the majority of players consider gaming to be a form of entertainment. As the survey in the U.S. Congress (1976) indicates, 81 % of respondents said that one of the reasons they bet at a casino was to have a good time and 47 % said it was for excitement.
- 19.
Historically, the industry has experienced only two important setbacks in the postwar period—in 1981 and in 1991—and both episodes coincided with economic recessions. The slowdown in 2001 was, in part, related to the terrorist attacks of September 11. New competition and market saturation, however, have already heightened the industry’s sensitivity to changes in the overall economy. See Rivlin (2007), Audi and McCracken (2008), Urbina (2009), who discusses the widespread decline of casino and lottery revenues in the recession that began in December 2007, and Nagourney (2010). Horváth and Paap (2011) find that in recessions the loss of income slows casino gambling expenditures.
- 20.
Grinols (2004, pp. 114–124) covers this in more detail.
- 21.
In September 1997, the Ninth Circuit Court of Appeals ruled unconstitutional a federal law banning the broadcast of gaming ads . This ultimately led to a June 1999 Supreme Court decision that struck down a federal law that had banned casino gambling ads on television and radio. See also Greenhouse (1999) and Ritter (1999).
- 22.
See, for example, Skolnick (1978, 1979), Mahon (1980), Abt et al. (1985), Goodman (1994, 1995), Grinols (2004), Whitehouse (2007), Caldwell (2008), and Chen et al. (2014). Walker (2007, 2013), however, takes issue with such negative assessments. A CBS 60 Minutes segment of January 9, 2011, “The Big Gamble,” is also relevant, as is Garrett (2003).
- 23.
See Sternlieb and Hughes (1983) and Goodman (1995, p. xi) and especially Butterfield (2005b), who shows that many states now derive a substantial percentage of their revenues from gambling. Nevada, Oregon, Louisiana, Rhode Island, and South Dakota generate more than 10 % of their total revenues from taxes on casinos, slots at racetracks, and lotteries. And in Rhode Island, gambling revenue had by 2004 become the third-largest source of income. On addiction, see Berzon and Maremont (2013).
- 24.
Walker (2007, p. 86) writes that many such antigambling studies do not “use a conceptually sound criterion for identifying social costs,” and this “has led to a capricious classification of some behavioral consequences.” In fact, his empirical work provides evidence that “legalized gambling does have a positive impact on state-level economic growth.” Walker (2007, p. 56) includes a review of extensive empirical studies. See also Cotti and Walker (2010).
- 25.
Acting on the wishes of the legislature, the commission specified the following:
Minimum size of table bets
Number of tables and slots of different denominations and type allowed in each casino
Hours of operation
Number of square feet of public space relative to number of rooms
Number of security guards required
Number of days per week that live entertainment had to be provided (in the first off-peak seasons there were days when there were more performers on stage than people in the audience)
Various other aspects of hotel-casino operations, including limitations on marketing that are usually considered in the province of management.
- 26.
As of 1985, for example, cash transactions greater than $10,000 have had to be reported to the Treasury Department.
- 27.
- 28.
Major casino companies as of 2014 include Harrah’s Entertainment (owning the former Caesars and Bally) and now named Caesars, MGM Mirage (owning the former Mandalay and Circus Circus), and Boyd. Gtech is prominent in lotteries and International Game Technology is the dominant brand in slot machines.
- 29.
There have been exceptions: In May 1989, the Atlantis (originally Playboy) hotel-casino went bankrupt, failing for a number of reasons. Creswell (2009) writes that the recession of 2007, arriving at a time of increasing competition, further depressed operating results and also led to bankruptcy filings.
- 30.
Multiples have generally ranged between 5 and 9 in recent years. Also, in evaluating individual casino properties for the purposes of merger or acquisition, “casino” cash flow, which is EBITDA before corporate expenses, might be considered a more appropriate measure against which to apply a multiple than EBITDA itself.
- 31.
For this reason, when a management attempts to assess the profitability of, for example, “junkets” (in which travel, hotel, and other expenses are paid by the casino-hotel in return for a promise to gamble a certain minimum over a few days’ time), it should use a formula that includes an estimate of the house edge, the average number of decisions per hour, and the average size of betting units. Similar criteria should be used in determining whether a bettor qualifies for “comps” (complimentaries), which may include any or all of free drinks and meals, shows, rooms, and transportation. Junket operators are much more important in Macau than in the US. See Osnos (2012) and Berzon et al. (2012). Speed of play is discussed in Zender (2009).
- 32.
Binion’s Horseshoe in downtown Las Vegas long had a unique policy whereby the player’s limit is as high as his first bet. Also, a group of high-stakes players can “pool” their play.
- 33.
See also the “Gambler’s Ruin” formula and de Méré’s problem in Epstein (1977, p. 131).
- 34.
For slot machines, the coins-in, or slot handle, is obviously a known quantity and is reasonably well correlated with the slot drop (i.e., what falls into a slot machine’s bucket after winners have been paid out). However, as explained later in the text, in table games , the handle is, under actual playing conditions, difficult to calculate and may be quite different from the drop. According to Nevada Gaming Control Board regulations , the statistical drop is defined as cash plus foreign chips and tokens plus pit credit issues and less pit credit payments in cash.
- 35.
Definitions of hold percentage are somewhat different in Nevada than in New Jersey. New Jersey’s definition includes all cash and markers, but Nevada’s definition does not include markers that may be redeemed at the table where the credit slip originated. All other things being equal, New Jersey hold figures are typically lower by 3–4 % than those of Nevada. The hold percentage , or the hold p.c., as it is also known, of course should not be confused with percentages used to express casino advantages (expected values) for table games . Such casino advantages are stated as percentages of handle and not as percentages of drop.
- 36.
If, however, as is more likely, players initially buy many more chips than they bet on each decision (some lose and some tend to walk away from a table without betting all the chips initially bought), then the ratio of handle to drop does not grow as rapidly as in this example.
- 37.
Win rates , of course, also depend on game rules, which may vary (especially in Nevada) according to the discretion of management.
- 38.
Bowden (2012) writes that whales won’t play by the standard rules. When business is slow, casinos value such players more and are willing to lessen their edge by offering discounts, also known as “loss rebates.” When players are offered a discount of say, 10 %, this means that on every $100,000 of loss, only $90,000 needs to be paid by the player. The casino might also stake a player up front by offering a negotiated amount of free chips or allowing other rules to be modified.
- 39.
Mentioned by Kilby (1985).
- 40.
Consider another illustration: In craps , on the “pass line,” the average cost per roll as a percentage of money bet is 0.42 %. This is determined by taking the house advantage of 1.41 % and dividing by the average number of rolls per decision, which is 3.38. The average cost to the player per roll of the dice, or conversely win per roll for the casino, can then be used to determine how long on average it would take for the casino to generate a certain amount of revenue, or what minimum average pass bet at the table might be required to win a certain amount. If in 1 h of play, for example, there is an average of 60 rolls, then 60 rolls per hour times 0.0042 cost per roll equals 0.252. For the casino to win $500 in that hour from just the pass line bets, the average pass line bet for the whole table would have to be $500/0.252, or $1984.13.
- 41.
A model that can be used for such purposes is described by Johnson (1984, p. 62). As illustrated in the following example, it includes variables for coin denomination, hold, average coins played, and cycle time.
Johnson’s model uses three equations:
1. Denomination × hold × average coins played = win per game
2. Average daily drop ÷ win per game = games played
3. Games played × cycle time ÷ hours operated daily = utilization rate
A sample calculation is then as follows:
1. $0.05(denomination) × 0.15(percentage hold) × 2.2(average coins played) = $0.0165.
2. To win $25, this machine must be played 1515 ($25/$0.0165) times.
3. If an average cycle time of 10 s is assumed, it will take 15,152 s (4.21 h) or a 17.5 % utilization rate over 24 h to reach these earnings.
Time on device (TOD) is thus a key factor.
- 42.
Rivlin (2004) notes that, on modern machines, a typical cycle time between games is around 6 s, which implies that in an hour the $2-per game player will place bets worth $1200. As of 2010, total slot wagering in the United States (i.e., the handle) thus easily totaled $1 billion per day.
- 43.
Note that the use of coins and bills in slot machines is an anachronism. In modern machines, credit cards and printed tickets obviate the need for physical processing of heavy coins and tokens and allow the player to choose the value of each credit wagered. This helps reduce operating costs and enhances marketing opportunities. See also Richtel (2006).
- 44.
- 45.
- 46.
Junkets in which rooms, meals, and travel costs may be picked up (i.e., comped) are not now of diminished importance because the casinos have found that junkets are not as profitable as they had been thought to be. A casino wanting to earn at least $100 should know that if it costs $400 to bring a junket player in the door, it must—on the assumption of a 20 % hold (win/drop)—realize a minimum drop that averages $2500. Stefanelli and Nazarechuk (1996, p. 135) write that a casino is generally “willing to comp guests up to one half of the amount it expects to win from them.” Players are rated by (a) buy-in amount to the game, (b) average bet, (c) largest bet, and (d) duration of play. However, an average bet-to-buy-in ratio often serves as a simple proxy for a bettor’s intensity of play and thus the level of comps warranted by such play. A low bet-to-buy-in ratio will artificially inflate the drop and thereby depress the hold percentage.
For table games , the comps rating, equal to the player’s theoretical loss times the percentage return, would be a function of
(average bet) × (hours played) × (speed of game) × (casino advantage)
Generally, the number of decisions per hour would fall into the following ranges:
Baccarat
50–110
Blackjack
60–100
Craps
75–145
Roulette
25–35
- 47.
The volume increase is a direct function of the credit extension itself and may also be indirectly affected by the exciting atmosphere that surrounds high-stakes tables, where smaller noncredit bettors may feel that they should become less conservative with their funds.
- 48.
This is described in Berzon (2009), who writes, with regard to one especially large bettor, that “casino operators often struggle to manage high rollers … Harrah’s also offered 15 % cash back on table losses greater than $500,000, special high-limit games and other incentives.”
- 49.
The simplest way to assess the value of each player for marketing purposes is to apply the following approximation:
$$ \mathrm{Player}\kern0.5em \mathrm{value}=\mathrm{average}\ \mathrm{bet}\times \mathrm{average}\kern0.5em \mathrm{hour}\mathrm{s}\kern0.5em \mathrm{play}\mathrm{ed}\times \mathrm{average}\kern0.5em \mathrm{decisions}\kern0.5em \mathrm{per}\kern0.5em \mathrm{hour}\kern0.5em \mathrm{of}\kern0.5em \mathrm{play}\times \mathrm{edge}. $$Taking double-zero roulette with an HA of 5.3 % as an example, players betting $25 per spin for 4 h at 40 spins per hour would have an average value of $212 (i.e., 25 × 4 × 40 × 0.053).
- 50.
In 1983, receivables in Atlantic City casinos rose at about twice the rate of win and foreshadowed the potential for a noticeably slower growth of revenues (win) in 1984.
- 51.
- 52.
This follows Eade (1996, p. 157). Fill slips record the value of the bills, coins, and chips that the cashier’s cage issues to the gaming tables, and credit slips record the value of these items returned to the cage. Nevada Gaming Commission Regulations [Number 6.040(5)] specify the method that must be used to transfer cash and equivalents between tables and the cage .
According to the regulations (and following Friedman’s (1974, 1982) presentation), “all fill slips and credit slips shall be serially numbered in forms prescribed by the board,” and the serial numbers must include letters of the alphabet “so that no gaming establishment may ever utilize the same number and series.… All series numbers that are received by the establishment must be accounted for. All void slips shall be marked ‘VOID’ and shall require the signatures of the two persons voiding the slip.”
- 53.
See Greenlees (2008, chap. 12).
- 54.
- 55.
- 56.
- 57.
Grinols (2004, p. 21), however, notes that gambling is biologically tied to an adrenaline rush and dopamine, which is a brain chemical that produces pleasurable sensations.
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Vogel, H.L. (2016). Casinos. In: Travel Industry Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-27475-1_5
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