The flood of articles proclaiming “skill-based” games as a solution to the (non-existent) millennial problem were correct about one thing: the fundamental demand for skill games in the casino.
Though slot machines have been the dominant profit engines of the U.S. gaming industry since the 1990s, skill games have long been the lifeblood, brand drivers and key differentiators of the modern American casino.
What the skill-based gaming articles get wrong is why skill games are in demand. It’s not because they require skill or physical dexterity; one key factor drives the demand for skill games, plus a spin-off:
- Profit motive. The prospect of profitability creates an incentive for the player to learn the complex strategies required to beat blackjack, win at poker or daily fantasy sports, beat video poker or beat the sports books. Profit motive drives the demand for strategy texts, training websites and related content. Meanwhile, the relatively low house advantage under basic strategy for traditional blackjack (compared to other casino games) and non-beatable video poker creates (or created, as the case may be) an incentive to learn the basic strategies for such games.
- The plausibility of profit motive. The mere possibility that sharps exist creates demand for blackjack, poker and sports betting by the ability to represent profit motive. Non-sharps want to play and be seen playing the games that sharps play, because these are the best bets in the casino—and it makes them look like sharps.
Where, then, is the next blackjack or next poker? And why are these games so hard to come by? To answer these questions, let’s break skill games down into three categories:
- Casino skill games (house-banked): Casino games that may be mathematically beatable (i.e., the player can play with a positive expectation). This category may include more traditional forms of blackjack (not 6:5 blackjack); video poker machines that may feature 100 percent-plus payback or may be beatable factoring comps; and to an extent, sports betting (a slightly different animal that in some ways functions similarly to player vs. player games).
- Player vs. player (PvP) games: Player vs. player (peer-to-peer) games, where players compete against each other, not the casino. These games may be raked (poker cash games) or fee-based games (poker tournaments). This group includes most poker but also daily fantasy sports (DFS), esports and some forms of multi-player, next-generation “skill-based” games.
- Casino skill-based games: Casino games where the house edge varies with skill, but which are not generally mathematically beatable (i.e., the player cannot play with a meaningfully positive expectation under normal circumstances). This includes modern iterations of blackjack (6:5 blackjack and most other variations); most video poker games with less than 100 percent payback rates; most non-traditional table games such as Pai Gow, Three Card Poker, Crazy 4 Poker and Ultimate Texas Hold’em; and next-generation single-player “skill-based” games from companies such as Gamblit Gaming, GameCo, Synergy Blue and Next Gaming.
We’ll tackle No. 3 (casino skill-based games) another time, starting with the challenges of casino skill games then diving into the challenges associated with growing the market for PvP games.
Blackjack and the Challenge with Casino Skill Games
There will never be another blackjack, because casino operators have no appetite for a game that’s mathematically beatable. We could end that discussion right there, but there are some observations worth thinking about given their broad applicability to other discussions—chiefly, the change in player skill level over time, and the impact of the (likely) self-selecting nature of 6:5 blackjack players.
We talked a bit about the decline of blackjack in the March issue of GGB (“Solving the Las Vegas Strip Value Problem”). The short version is that the house advantage across the casino floor has been on the rise for more than two decades now, and table games are no exception.
Casino operators first moved to make blackjack unbeatable by implementing continuous shuffling machines, before changing the payout on blackjack to 6 to 5 from 3 to 2 (adding 1.39 percent to the basic strategy house advantage), and replacing blackjack outright with higher-edge, proprietary games such as Three Card Poker. As a consequence, blackjack has become increasingly marginalized, falling to under 50 percent of table games units on the Las Vegas Strip in 2018.
One challenge with casino skill (and skill-based) games is the likelihood that the player pool will improve over time. In The Theory of Blackjack, Peter A. Griffin pegged the cost of player errors in blackjack at 1.41 percent (hence the common-knowledge estimate that the average player plays at about a 2 percent house advantage, given a basic strategy house advantage of about 0.5 percent). In Casino-ology 2, Bill Zender observed that the average player lost only 0.83 percent due to player error.
In other words, the average blackjack player appears to have gotten better over time, which makes sense given both the widespread casino expansion across the U.S. (wider access means that the average player will be more experienced) and the increasing availability of strategy tutorials. That the player has improved is probably at least a partial catalyst for the widespread move to 6:5 blackjack, in order to recover profitability.
Another aspect worth noting—the probability that 6:5 blackjack players are self-selecting. For a player to choose 6:5 blackjack tends to mean that the player doesn’t know what 6:5 blackjack is. The type of player who plays 6:5 blackjack is likely to make more mistakes, providing a juicy double whammy, which makes it harder for the casino operator to get away from offering 6:5 blackjack. Hence blackjack’s death spiral, and the increasingly utter lack of reasonable games for an increasing pool of non-idiot gamblers to play.
Poker: Attrition Rates and the Skill Gap Problem
As the average player’s increasing skill in blackjack has posed a challenge for casino operators, the average player’s increasing skill in poker has posed a challenge for the poker economy.
Back in 2012, I introduced the skill gap problem and discussed its impact on poker’s weakening economy (Google “Sorry, Mr. Online Poker”). The skill gap problem goes something like this:
- For a professional player to continue playing in significant volume, the player must have an edge over the opposition that’s greater than the size of the rake.
- Over time, the skill level of the regular players rises, as do the number of players with professional-level skills.
- As fish get wiped out and exit the game, games become tougher, the threshold for a professional player rises, and the marginal pros also exit the game as they can no longer beat the rake.
- As the games get tougher, more fish get wiped out, further raising the threshold for a professional player.
- As players get wiped out, rake (revenue) drops and liquidity suffers, and—as we have observed—poker rooms close.
When the existing player pool gets tougher, the house advantage against new or casual players increases, and new and weaker players get wiped out faster and faster.
As we discussed in 2014 (Google “Online Poker’s Fundamental Problems”), PartyGaming observed the new player retention rate fall—and thus the attrition rate of new players rise—from the very beginning of the poker boom all the way to the end of its existence (PartyGaming merged with Bwin in 2011 to become bwin.party, and is now part of GVC Holdings Plc.).
The table below, from PartyGaming’s 2005 Annual Report, shows the decline in player retention rates for new player signups from 2003 to 2005.
By 2010, the six-month attrition rate had climbed steadily to 79 percent from 67 percent in 2005; the 12-month attrition rate reached 84 percent, meaning that 84 percent of new players were wiped out from the site within a year. Note that the 2006 figures are non-U.S. due to the impact of UIGEA (the Unlawful Internet Gambling Enforcement Act of 2006), which forced PartyGaming from the U.S. market.
The skill gap problem isn’t unique to poker, and is more likely a general condition of PvP skill games, from poker to Golden Tee. The advantage that poker has had is that hold’em in particular is easy to pick up yet strategically complex. (In Mike Sexton’s voice, “It takes a minute to learn and a lifetime to master.”) Games that are harder to pick up (harder to create a market for) or less nuanced (easier to master) tend to have shorter life spans, particularly as games are solved faster than ever before.
In 2015, we applied these same principles regarding the skill gap problem and attrition rates in discussing DFS (Google “DFS and Lessons from Poker: How Bright is the Future?”).
Online Poker and DFS: The Problem with Multi-Tabling
As any poker player can tell you, online poker games as a rule tend to be far tougher than live poker games. Let’s say you have an online poker room with 10 tables running; Phil Ivey can play on all 10 at once, whereas in a live poker room, he can only exist on one.
Without knowing anything about poker except that Phil Ivey is good at it, you know online games are tougher than live games. This disparity is exacerbated when you consider that online games are more often played six-handed or less while live games are more often played nine- or 10-handed.
In online games, the best players take up proportionately more real estate, and in a format (short-handed games) where raw poker skills are emphasized over patience and basic hand valuation skills (which are easier to acquire and more valuable in nine- and 10-handed full-ring games, and especially in softer live games where multi-way pots are more frequent).
It’s clearly better for the long-term health of a game—to keep a game running—to have a softer game where the casual players (“rec” or recreational players) don’t get wiped out as fast, which goes right back to the topic of the problem of increasing attrition rates.
Why is it so hard, then, for online poker sites to restrict multi-tabling to improve the quality and life of the game?
It’s a chicken-and-egg problem. There are few barriers to entry in online poker and a lot of competition, at least until smaller competitors in a given market get wiped out. The only safety is in size—the largest poker rooms benefit from network effects.
Liquidity breeds liquidity; larger sites draw more action, allowing for more game types, enhancing the product offering and drawing more action over the competition. Further, more games running equal more revenue, at least in the short run. If you’re an online poker room and don’t allow multi-tabling but other sites do (which is generally the case), the others are going to appear larger and draw more action.
This isn’t optimal for the health of the game, because the size game is the one that online poker sites have to win in order to survive. For better or for worse, online poker sites tend to cater to multi-tabling professionals and their ability to create a market (and thus liquidity) on their sites, at the expense of recreational players and the life of the game.
PvP contests aren’t terribly profitable for most operators to begin with. As it is, online poker revenue (termed “peer-to-peer”) in New Jersey for the first two months of 2019 was down slightly over 2018; at $3.7 million, it was a fraction of the $65.3 million in total internet gaming win and insignificant compared to $31.5 million in sports betting win through February.
It’s the same challenge DFS faces and other PvP online games likely face. If you’re a DFS site and you let players enter multiple contests simultaneously, the strongest players populate more of the games, making the contests tougher for everybody else and leading to increased attrition rates. The gist of it is that the incentive to cater to professionals at the expense of everybody else and the health of the game is not limited to poker.
The PLO Revolution: How Skill Games Succeed
When I wrote “Pot-Limit Omaha Poker: The Big Play Strategy” in 2006-07, PLO was played online and in Europe, but in the U.S. was largely only played for mid-to-high stakes in the riverboat states of the Midwest and South, and in Las Vegas during the World Series of Poker. My goal was to change that by setting up sustainable smaller-stakes games and educating players on how to play the game, in order to:
- Drive down the stakes and widen the player pool in order to grow the game; and,
- Slow the rate of attrition to make the games sustainable.
PLO is basically no-limit hold’em on steroids; it’s hold’em except every player is dealt four hole cards and the player’s hand at showdown is the best five-card hand the player can make using exactly two of his/her hole cards and three of the community cards, while utilizing a pot-limit betting structure (the player can only bet up to the size of the pot at any given time) rather than a no-limit betting structure.
Because the player has four hole cards, the drawing hands run far bigger than in hold’em, where the biggest straight draw in most forms of poker is an eight-out straight draw. The player can have as much as a 20-card straight draw in Omaha (for example, J-10-7-6 on a 9-8-2 flop yields 20 straight outs, as any queen, jack, 10, 7, 6, or 5 will make a straight). When combined with flush draws, the player can have absolutely monster draws that can be a favorite over even a set, thus blurring the line between made hand and draw. Despite the pot-limit betting restrictions, pots get big in a hurry, because more hands can reasonably lay claim to the pot.
Consequently, PLO breeds action, and is often the highest-stakes game in card rooms in which the game is spread.
This is a game everybody would play if: (a) they knew how, and (b) it could be played at reasonable stakes, such that the player can blow multiple buy-ins without going broke.
That’s the rub. For starters, $2/$5 PLO tends to play bigger than $5/$10 NLHE. The first live PLO game I ever played was the uncapped (no max buy-in) $5/$5 PLO game at Ameristar St. Charles in St. Louis; there would be $40,000 on the table with at least one or two $10,000 stacks. The $10 straddle (in effect, a blind raise) would always be out, and it would often be a blind raise to $40 and $200 to see the flop.
You realize that you have no control over the size of the game—in NLHE, the action is relatively stunted somewhat pre-flop because you can take AA and simply shove with it. In PLO, you can’t do that (because of the pot-limit betting restrictions), and nobody cares anyway because AA is easy to outrun with four cards.
Plus, it’s not practical to structure a live PLO game aimed at $1/$2 NLHE players using chips and cards. As such, the goal was to structure games aimed at $500-max buy-in $2/$5 NLHE players.
Straight $1/$2 PLO doesn’t work for many reasons beyond the scope of this text, but I’ll explain it anyway. For starters, the game needs to be played with red ($5) chips after the flop, the alternative being having the dealers and players track $1 chips for betting purposes, which is impractical. Secondly, under a straight pot-limit structure, the opening pot-sized raise is to $8–which is painfully small, considering that is not uncommon to see players open to $12 or $15 even in $1/$2 NLHE.
The fix is often to implement a separate bring-in amount (correct) or use a straddle (incorrect); the problem with the straddle is that you’ve changed the size of the game. Where it may be somewhat typical for NLHE games to have 100bb (100 times the big blind) max buy-ins (e.g. $500 max for a $2/$5 NLHE game), you really need 150bb stacks to really play PLO, given that pot-sized bets and multi-way pots are standard; this means that if you allow a $5 straddle, you’re going to want to raise the buy-in amounts to higher than $500, which defeats the purpose of trying to shrink the size of the game.
Thus, the straddle—which is $10 in the $1/$2 with $5 bring-in structure—should not be allowed in the $500-max buy-in game, as your $500 buy-in is now only 50bbs, and a $200 min buy-in is now a 20bb short-stacker, which is bad for the game.
Over the course of 2007, we started a weekly small-stakes PLO game at Ameristar St. Charles (to go along with the twice-weekly monster $5/$5 and eventually $5/$10 PLO game) utilizing a number of betting structures with a $200-min/$500-max buy-in, including a straight $2/$3 blind structure and a $1/$2 blind with $5 bring-in structure I had come across while playing in Tulsa.
By the end of 2007, my friends and I had started the first daily PLO game in the country: a $1/$2 blind with $5 bring-in ($200-min/$500-max buy-in) game in the new WSOP poker room at what was then Harrah’s Maryland Heights (now the Hollywood Casino St. Louis).
When I moved to Las Vegas in the summer of 2008 after the WSOP, there were no regular PLO games in Las Vegas, as few poker rooms in town even cared to try—for many poker rooms, poker was still all hold’em, all the time. We first tried to get a regular $2/$5 PLO game going at the Wynn in August 2008, but the stakes were too high for the existing player pool at the time, and it didn’t take with any regularity.
But then at the end of October, I got a call from Lou White, then vice chairman, co-founder and former CEO of PokerTek, the company behind the PokerPro electronic poker tables. Lou asked if I would host a regular small-stakes PLO game in the new all-electronic poker room at Excalibur. In November, we launched a weekly $0.50/$1 ($100-min/$200-max) PLO game on the electronic tables, which ran every Thursday up until the WSOP in June 2009, after which the electronic tables were removed.
That July, I walked into the poker room at the Venetian one evening and spoke to the shift manager, Tracy Mendiola. I said I had a game and a structure in mind, and that if they would agree to stick to the structure, we’d play the game there.
The next day, we launched the first daily PLO game in Las Vegas, a $1/$2 blind with $5 bring-in PLO game ($200-min/$500-max buy-in) with no straddle allowed. The game ran every Thursday-Friday-Saturday right from the start, and within a couple of months was running every day.
In May 2011, my buddy Steven “TT” McLoughlin and I went over to Aria and proposed starting a second daily PLO game to Adam Altweis, the poker room manager.
Adam agreed to restructure their PLO game lineup immediately; the small-stakes structure I had in mind was a straight $1/$3 blind structure (no separate bring-in amount), again with no straddle, which would play smaller than the $1/$2 with $5 bring-in structure, and thus have both a wider player pool and more staying power. Before we had even announced the game publicly, the game was already running, and has run daily right from the start; the Aria poker room has dominated the Las Vegas PLO market since.
The game has grown spectacularly, such that regular PLO games can now be found in most every state where poker is played. Many of these games are based on the $1/$2 with $5 bring-in structure employed here.
The small-stakes Las Vegas PLO games have changed a bit since; Aria has since switched to the $1/$2 with $5 bring-in structure and allows the $10 straddle, while the Venetian moved to allow the straddle (and initially raised the max buy-in to $1,000 to compensate) after we started the Aria game, and the regular daily game has since migrated over to the relatively new poker room at Encore.
That said, if the poker economy wasn’t shrinking, there might be room for a third, smaller game using the $1/$3 blind structure without the straddle; the smaller game would again have a wider player pool and more staying power, which is precisely how Aria took over from Day One.
The Challenge at Hand
This is the challenge that the first multi-player skill-based games are facing and must overcome. As I’ve written before, because the game speed is slow, the stakes are high and the rake is high. Because the stakes are high, the cost of the learning curve is high. And because the rake is high and there is no pre-existing market for these games, there is no profit motive to create a set of winning players to make the market for these games, as we had for PLO.
