Ten years ago, few questioned how operators managed the industry’s cash cow, the slot floor. Over the past couple of years, though, the cow has become a lot harder to milk, and what was once unthinkable is now one of the few things on which everyone agrees:
Everywhere you look, slot revenues are down.
Six or seven years ago, it was easy to blame the national economic crisis for slumping revenues across the industry, from slots to tables to non-gaming amenities. However, as hotel and even table-game revenues rebounded with the recovery of key economic indices, revenues on the slot floor have remained mired in an unprecedented funk.
Slot players have long been suspicious of casino operators, imagining everything from slot managers in back rooms flipping a payback switch to tighten games when players were winning to wholesale modifications of payback percentages on the fly. Focus groups, letters to consumer magazines and feedback from loyal players always ended up with the same complaint: their money doesn’t last as long as it used to on the slot floor, and as evidenced by declining slot win, they are simply not visiting the casino as often.
Ask a player, and he or she will always point a finger directly at the casino operator, with an oversimplified charge that all operators have jacked up slot holds to recover revenues lost to the recession. During the past year, however, similar charges have been coming from the industry itself.
The first questions came from industry analysts and suppliers. Last July, New York-based Buckingham Research Group released a study titled, “How Higher Slots Holds Have Damaged the Regional Gaming and Equipment Business.”
The study examined published slot hold statistics in seven regional gaming markets, including Nevada, from 2004 through 2013, finding operators have increased overall slot holds by 40 percent or more in some markets.
“As slot holds move higher, time on device declines as customers lose their money faster,” wrote Buckingham’s Brian McGill, the study’s author. “We estimate that in 2004, a player could budget $100 to play slots and gamble for 3.2 hours on a 75 cent-per-spin bet. With higher holds, $100 may only last 2.6 hours, a 22 percent decrease. If we assume the average bet moves from 75 cents to $2 for the most popular games, the average time goes from 3.2 hours to one hour.
“We think operators have looked to offset the competition by increasing holds to boost margins. The proliferation of penny games on slot floors due to the introduction of ticket-in/ticket-out technology is another driver.”
In addition to the players themselves, the rising cost to play slots has damaged the slot manufacturers, McGill continued. “This is a major negative for the slot manufacturers,” he wrote. “We think operators will continue to limit CAPEX on slot floors, which is a negative for replacements and game sales. Operators have also continued to remove costly participation games, which hurts gaming operations revenue.”
Manufacturers soon took note, initiating research of their own. In September, the Association of Gaming Equipment Manufacturers (AGEM) announced that it was initiating a study to determine whether rises in slot hold can be linked directly to declining slot revenues.
According to Marcus Prater, executive director of AGEM and formerly a longtime marketing executive of slot-maker Bally Technologies, the decision to research the issue came out of a request from Scientific Games CEO Gavin Isaacs and Executive Vice Chairman Richard Haddrill, not long after the Buckingham study came out.
“After some brainstorming, they both singled out the hold-percentage issue as a hot-button item that required further investigation in terms of the correlation between the tightening of machines and the overall decline in slot revenue,” Prater recalls. “And at the heart of it, you have two games guys who want the product of all the work that goes into creating these games to be enjoyed and embraced by the playing public.”
Among other things, the study—still in its early stages—will examine sales records of AGEM members, looking for changes in the hold programs purchased for games over the past few years. But first, the study is going much farther back in history. “Applied Analysis, a respected firm in Las Vegas, is analyzing slot holds in 15-plus states going back to the beginning of the riverboat era, and matching those changing slot holds to the revenue numbers in each of those markets,” Prater explains, adding that AGEM is in discussion with the International Gaming Institute at the University of Nevada, Las Vegas for a secondary component.
WMS Gaming, one of the newly merged Scientific Games’ main divisions, initiated a study of its own on the subject, releasing a white paper at last fall’s Global Gaming Expo by Allon Englman, WMS vice president and design chief, titled “Keeping Players In The Game: Breaking the Cycle.”
Englman’s study revealed that declining slot revenues can be traced to much more than just operators raising the holds. However, factors such as increased cost to cover, the speed of the games themselves due to technology, higher volatility and the increasing popularity of the penny denomination still end up with one factor affecting the experience of the player—high holds, and less time on device.
“The net effect is that it doesn’t matter what anyone says or does—if you have a higher-hold game, the player will lose quicker,” Englman says. “That’s undeniable. Some players don’t notice. In fact, I would say most players would not notice a 2 percent or 3 percent hold difference. I’ve played hundreds of millions of slot games, and I can’t tell a difference of 3 percent. But after everything you’ve said and done, you’re losing 30 percent faster.
“And eventually, you will notice it. You may not notice it from one game to another, but you’ll notice it if you have to drive an hour to a casino and you play 30 percent less over the course of a year.”
“Money is not going as far,” says Prater. “There’s no question there is an outcry, and there is an outcry for a reason. Players obviously would like nothing more than 99 percent games, but I do think the outcry is one of basic fairness and entertainment value, and clearly, there is something to all of this discussion.”
Prater says the AGEM study will look at all factors contributing to declining slot revenues and the erosion of the slot player experience, and, as Englman’s white paper showed, the issue goes way beyond operators jacking up holds to shore up revenues.
Declining slot revenues are, in fact, the result of a perfect storm of changing game style, faster play, increasing minimum wagers, free play replacing cash coupons and yes, the economy, as many believe consumer confidence has not yet returned to the free-betting ways of 10 years ago.
“The consumer is still struggling,” says consultant Jeff Jordan, principal of Jordan Gaming Consulting Group and former director of slot operations and marketing at Bellagio. “They’re not earning income the way they were before the crisis. I think that’s still the No. 1 issue we’re facing. Also, the whole social gaming phenomenon, if you argue that’s a substitute product to slots, means we’ve discounted our product. It’s cheaper to play Cleopatra on a social casino than in a real casino.”
Slot hold, in itself, is both a cause and result of all these factors, which is why it can be a sensitive issue both for manufacturers and operators—evidenced by the reluctance of just about anyone currently in the industry to even discuss the issue. Officials from MGM Resorts, Station Casinos, Boyd Gaming, Penn National Gaming, Hard Rock, Isle of Capri Casinos and Seminole Gaming all declined to comment for this article. Among the largest manufacturers, IGT, Konami and Aristocrat declined requests for interviews.
The largest operator in the U.S., however, defends its pricing decisions on the slot floor, and Caesars Entertainment has nearly two decades of empirical data to back up its policies. Caesars Executive Vice President Melissa Price has been in the thick of the slot evolution since joining the operator as vice president of slot technology and operations in January 2006.
Price notes that Caesars has been studying the slot pricing issue since long before the recession. CEO Gary Loveman brought in a team of MIT mathematicians in 1999, and that same team has advised the company on optimal pricing for slot machines, using the same principles that retailers use in setting the price for any variety of goods—the price is set at the highest level acceptable to the customer, or the lowest that will return a profit for the company.
“We’ve been studying this since early 2000, and we’ve done lots of different tests over all these years,” Price says. “And I’ve been in a role where I’ve had an opportunity to either be directing that or to be advising on the hold percent the last six or seven years. We don’t have a hold percent policy that says ‘let’s pick the highest or lowest.’ We’re looking for competitive, and we’re looking for an entertainment experience for the guest that will allow them to have the right play experience and allow us to meet our budgeted numbers. It’s a balancing act, just like it would be with any retailer.”
Caesars’ researchers also have continuously evaluated what is wrong with the slot floor, and the conclusion is similar to what Englman found in his study—slot hold is only one of many factors, but a comparatively minor one in relation to what she says is the big issue: how the style of the slot machine has become dominated by high-hold, multi-line penny games.
“The player’s money doesn’t last as long on a penny game as it used to when they played a quarter reel game,” says Price, “but it’s not tied one-for-one to the hold percent. I think more of a contributing factor is how the games have evolved.”
Many operators and former operators agree. “The greatest misnomer we have is that we continue to refer to these multi-line video reel games as penny machines,” notes Andrew Klebanow, a principal of consultancy Global Market Advisors who was a longtime marketing executive for various casinos and general manager of the Santa Fe in Las Vegas. “When I was a general manager, our lowest denomination game was a nickel machine. Because it was a nickel machine, we probably had an average bet of 20 cents. And because of that, we priced the game higher than quarter and dollar machines.
“When you look at a multi-line video reel machine today—what they call a penny game—the average bet is $1.90, $2 a spin, certainly more than what an average 25-cent bet was 10 years ago. And yet, we continue to consider these games penny games, and we price them, in terms of hold, at a much higher rate than other games.”
Frank Neborsky, who recently left Connecticut’s Mohegan Sun after 18 years as vice president of slot operations, agrees that the rising cost to play penny games has been a factor in players losing money faster than in the past.
“When you play a higher-denom game like a quarter or dollar, you had a noticeably lower hold percentage, because you were really pricing your product based on the risk involved,” he says. “If a player was going to risk 75 cents a spin on a quarter game, you may price it at one level, but if you have a dollar player willing to risk $3, you set it higher. Pennies came in and operators said OK, it’s a penny game, so we’re going to ratchet down the RTP (return to player) and increase the hold.
“Early on, you had a nine-line game, and people were betting 9 cents. But then, the manufacturers began to put a lot of emphasis on the development of these games, so it changed the way the game played.”
“Pennies didn’t start out as 500-coin events,” comments Prater. “They were 45-coin and 90-coin events. When pennies came onto the floor at less than a dollar per max spin, yes, the payback percentage was probably appropriately in the 86-88 percent window. But now we’re in 500-coin penny games, and operators continue to put 86-88 percent penny games on their floor. That’s where the line gets crossed on what’s fair and reasonable to the player.”
Price says Caesars does take average bet and cost-to-cover into consideration in pricing decisions. “For example, when high-line count video games are placed in the high-limit room, we review pricing to align hold on like bet-sized games,” she says. “Also, Total Rewards (Caesars’ national payer’s club) plays a key role. If a player chooses the entertainment of a multi-line video game, and plays at a higher bet level, they receive greater TR rewards.”
Free Play Factor
Player’s club rewards, in fact, constitute one of the key factors in rising slot hold. When automated free play replaced the old coin coupons, those rewards went off the books of the marketing department and onto the revenue books of the slot department. “When I was a general manager back in the 1990s, I would have this very real and hard number on my income statement every month—direct mail offers redeemed for cash,” says Klebanow. “It was the biggest number on my marketing P&L. Once we started moving to free play, where free play replaced direct mail offers and points redeemed for cash, that direct-mail cash number vanished from the income statement.
“That very real, hard number—say half a million dollars a month—simply disappeared from my income statement. So where did it go? It went into what’s called a contra revenue account. That number was deducted from gross slot revenue, and what appeared on the income statement was net slot revenue. Now, the slot director had to deal with another half-million dollars of free play going into his machines, and to maintain his slot-floor PARs, he had to increase hold.”
Steve Gallaway, Klebanow’s partner in Global Market Advisors and a former slot operations executive, says the free-play situation is key to understanding the slot hold issue. “In Pennsylvania, we look at the percent of handle that is free play, and it’s around 35 percent,” he says. “That’s a huge number. It means 35 cents of every dollar going into the machine is free play. If you still want to get all of your customer’s wallet, you have to increase the slot hold.
“Now, if I’m a new customer coming to the casino with $100, my $100 is going away much more quickly than the guy from my database who’s coming in with $140 including $40 of free play. The new customer loses money quickly because the machine has a high hold percentage and he doesn’t have free play going in. And he doesn’t return, because he had a lousy experience.”
“If you’re giving away free play, there is an impact on slot hold, an impact on the profitability of the game,” says Neborsky, now a principal of consultant Power Strategies. “If you’re giving away hotel rooms, if you’re giving away food—it’s all a matter of the full value and full worth of that player. If I give a 10 percent premium over and above what the slot hold is, that’s going to diminish the profitability of the game, and the only way some of these casinos may look at continuing to be competitive is to give these other offers, but raise slot hold on the back end to make up for it.”
Other promotional costs diminish slot profitability. “We took a holistic view of the true profitability of a slot machine, and we factored in all the ancillary expenses,” Neborsky says. “If we’re doing free play, if we’re doing other bonusing offers, if there is a lease fee or wide-area progressive fee associated with the game—those fees come off the back end.”
The final characteristic of penny slots affecting slot hold is the rising volatility of the low-denomination, high-payline game. As ancillary factors contributed to increasing slot hold, and as average wagers went up, the manufacturers injected the kind of volatility formerly reserved to reel games into the multi-line video slot.
“If you look at the history of these games,” says Klebanow, “they came to the U.S. from Australia in the late 1990s, and they were very popular, because they had game algorithms that reduced the volatility of the slot machine; you were able to play a little bit longer.” Players soon complained they were constantly receiving “wins” that were actually losses. “You’re getting a 70 percent win frequency on some of these games, but you’re often not winning enough to cover your bet,” comments Neborsky.
The remedy? Manufacturers designed video slots with reel-style volatility. “Volatility has increased dramatically from a decade ago,” says WMS Gaming’s Englman. “It’s not coincidental that the desire for volatile-style games has increased as hold percentages have increased, because the best way to disguise hold is through increased volatility. You can win or lose larger amounts of money, and you’re more likely to blame the luck of the game than to say the holds are high.”
The final piece to the high-hold puzzle is technology—namely, the speed of the game. “On old-school Reel ‘Em In, you couldn’t physically get more than eight spins a minute out of the game,” Englman says. “It was on an old processor. Nowadays, on the average game, you can get 14-17 spins per minute out of every game.” He says faster play combines with volatility, increased cost to play and higher hold to erode the slot experience for the penny player.
Jordan adds that one more factor exacerbating the pricing situation is overcapacity. “Each casino’s decision on where it should price depends on the supply and demand of gaming devices inside that population corridor,” he says. “The less competitive the market is, the more room there is to have higher hold percentages.”
The WMS white paper acknowledges that operators increasing slot hold is only a small factor in the erosion of the slot experience—Englman’s study concludes slot hold is only 20 percent of the reason people are playing slots less. The largest reason is the cost to play, at 35 percent. (See pie chart, page 20.) “It was so interesting to me that 80 percent of the change in how much faster the guest’s money is taken is due to everything other than hold,” comments Price.
Changing the Game
So, why have manufacturers kept pumping out high-hold penny games, and why have operators kept buying them? Because players love them, says Price.
“Caesars actually was slow to get into a big percentage of the floor with lower-denomination games,” she says, “but then, in ’05 or ’06, we started to get more aggressive there, and the customers would say to us, ‘We love these games; they’re so much fun.’ So we keep adding the games, and all of a sudden, we find ourselves with 60 percent of the floor covered with penny games.”
The manufacturers haven’t helped with a variety of other game styles, she adds. “The challenging thing from the seat I sit in as somebody that buys slots for a very large organization is that we’ve had very little that we can purchase outside of a low-denomination video game,” she says. “And there were several years in there where our dollar reel games and that dollar reel player were not getting any new product at all.”
Neborsky agrees. “One of the arguments I’ve had as an operator over the past six to eight years is that there are no good quarter games anymore, and no good dollar games,” he says. “There has been some development there to try to create a better game mix, but that’s only within the past two years.”
“There are more slot manufacturers than ever before, and the products all look similar,” says Jordan. “They’re all competing for the same market segment; it’s monkey-see, monkey-do. We’re not seeing the kind of innovation we saw when Wheel of Gold came out, or when Triple Play Poker came out.”
“I think that we also created some of the pickle that we’re in now,” says Price, “because we, the industry, devoted too much R&D money to one place, and everybody was in the race to sell low-denom penny games. Well, now you’ve seen some players like Aruze, Ainsworth and MGAM, some of the smaller guys over the last couple of years come in and say, listen, we feel like there are these niches of players who have been left without any new product. And those companies have done very well by coming in and finally introducing some reel product back in.”
But Price isn’t sure more reels are the answer—she suggests an entirely new paradigm for the slot floor, one that does not involve sitting on a stool in front of a row of boxes.
“It almost feels like a bit of a perfect storm happened around the ’07-’08 time frame, because the recession hit, and at the same time there has been such an expansion of social games and the mobile, social casino games… Now I have all these other potential substitute products (to slot machines),” she says.
“Myself and my team, we play the social games like crazy, because we’re very interested in trying to understand what that customer experience is on the social game. And unfortunately in an existing casino game today, it’s lacking many of the key attributes of a social game. The things like achievement, and advancing through levels, multiple ways to win with virtual coins and power-ups… Those kind of things are lacking in the casino game today.
“We have four or five iPads at our house, and someone has one in their hands at all times. Everyone has their smart phones on them. The casino floor is well behind that. There has to be the opportunity for people to have the option to address technology as they address it in their leisure time. And comfortable chairs! I don’t sit in an upright chair at my house.”
In a March earnings conference call, Loveman said the current slot product is “antiquated.” Price suggests the sameness of slot machines could be a big reason revenues are down, and that a radical reassessment of what a slot machine is could be in order.
“I have a lot of meetings with manufacturers, and tell them it takes two weeks to create an online game. And in our world, it takes 12 months to create a game, and that’s not counting regulatory. Do you imagine for one minute that maybe we’re just focusing on the wrong thing—maybe we’re just spending far too much time trying to get to some level of perfection that the customer really doesn’t give a hoot about?”
Price suggests spending some of the R&D money used to create those breathtaking 3D graphics and using it to produce a new style of game. “When you play online, whether it’s Angry Birds or Trivia Crack or whatever the latest game is, those graphics are goofy, and they’re not perfect, and they’re not as crystal as the things we’re trying to create in our industry,” she says. “I question if we spent all this R&D money to make things a certain way when you could spend half that and make something that would be just as exciting for the customer. Then, you could spend the other half on trying to create something new, instead of just making the same old thing the same certain way.”
Price sums up the problem with what she calls her “Best Buy story:”
“I’m Best Buy, and I sell DVD players to the public. The public is telling me, ‘I’m not really interested in buying DVD players, because I can play DVDs on my Xbox, and I can stream all kinds of things through Netflix.’ I turn to Sony, the manufacturer, and say, ‘I just can’t get the customer interested in that DVD player.’ Sony says to me, ‘Well, Best Buy, why don’t you lower your price to the customer so you can sell more of them? You’ll have to take less of a margin, but go ahead and do that, because me, Sony, I’m just going to keep making more DVD players.’
“And that just seems like such a ludicrous discussion if you put it in the context of a different business than ours, but it feels like that’s the discussion we’re having.”